Breaking Even

WHEN SHOULD RETIREES claim Social Security? Let’s dispense with a few preliminaries. If you have young children, it may be worth claiming at age 62, so your kids can receive family benefits. Meanwhile, if you’re married and you were the main breadwinner, it’s probably worth delaying benefits to age 70 to get the larger monthly check. This is true even if you are in poor health. The reason: Your benefit may live on as a survivor benefit for your spouse.

Instead, we’re keeping it simple. We will assume you are single and your full Social Security retirement age is 66. You’re trying to decide between a monthly benefit of $750 starting at 62, $1,000 at 66 or $1,320 at 70. Your plan is to take the money and invest it in high-quality bonds, and you want to know what the breakeven age is. In other words, if you take benefits later, at what age would the monthly checks you’ve collected be worth more than taking benefits at 62?

Social Security benefits rise each year with inflation, so you need to figure that into the calculation. To make things easy, let’s think in terms of real (after-inflation) returns. For instance, if 10-year Treasury notes are yielding 2% and inflation is 2%, your real return is 0%. We will look at three scenarios in which high-quality bonds deliver after-inflation annual returns of 0%, 1% and 2%. Based on those three real returns, how long would you have to live to make delaying benefits worthwhile?

If you delay from age 62 to 66 and you’re investing in bonds that deliver a 0% real return, you’ll be ahead shortly after you turn age 78—and the longer you live after that, the greater the advantage grows. Meanwhile, at a 1% real return, delaying benefits to 66 will put you ahead if you live to age 80, while a 2% real return will put you ahead by age 81. What if you delay benefits from age 62 to 70? You’re ahead at age 81 assuming a 0% real return, 82 assuming a 1% real return and 83 assuming a 2% real return.

What if you plan to invest in stocks, not bonds? That could raise the breakeven age, because the potential return is higher. But the risk is also vastly greater, and that messes up the analysis. You shouldn’t make a straight comparison between a relatively sure bet (the government keeps paying Social Security) and something so uncertain (remember, stocks lost roughly half their value in 2000-02 and 2007-09) without factoring in the difference in risk.

Next: Spousal Benefits

Previous: Early and Late

Articles: The Magic Number and Worth the Wait