Breaking Even

Jonathan Clements

IT’S THE NEVER-ENDING debate: When should retirees claim Social Security? This piece, I hope, will at least serve to clarify the basic math involved.

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.

But today, we’re keeping it simple. Let’s 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 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?

It’s time for a few more preliminaries. Social Security benefits rise each year with inflation, so you need to figure that into the calculation. To make things easy, I like to 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%.

What if you plan to invest in stocks, not bonds? The potential return is higher—but so, too, is the risk. As I mentioned in a recent article, it simply isn’t fair to compare a relatively sure bet (the government keeps paying Social Security) to something so uncertain (lest anyone has forgotten, stocks lost roughly half their value twice in the past 15 years). Instead, if there’s an investment alternative to Social Security, it should be high-quality bonds.

Let’s consider three scenarios in which high-quality bonds deliver after-inflation returns of 0%, 1% and 2% a year. 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. 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.

So how long can retirees expect to live? According to the Social Security Administration, the median life expectancy for a 65-year-old man is age 84, while a woman can expect to live until 87.