Social security break-even calculations can be misleading for retirees

This is usually a debate that arises when one must decide to delay social security benefits: Will this result in less total money during your life?

The longer you wait for your retirement checks – up to the age of 70 – the higher your monthly payments will be.

That is why experts usually advise you to stay away, unless personal circumstances, such as health status or marital status, make the advance settlement request more advantageous.

Critics point out, however, that the wait will extend the time needed to reach the "breakeven point" or the point where the amount you will receive if you claim later is equal to the amount you would have received if you had started earlier .

The age at which you will reach your breakeven point generally ranges from 77 to 83 years, depending on when you started receiving benefits.

Social security is designed in the interest of "actuarial neutrality". In other words, it does not matter if you start receiving your benefits sooner or later, you should receive roughly the same total amount in your lifetime.

According to Joe Elsasser, president of Covisum, the social security synchronization software provider, calculating your individual break-even point can be done by calculating the cash you'll receive when you claim earlier than you would receive if you're late.

However, some blind spots can create misleading results and mislead you.

When calculating your break-even point, you need to consider what you could have earned if you had taken the money earlier and invested it, Elsass said.

While this may be difficult to calculate on your own, professional software and some consumer calculators can help you.

Each year, you delay your benefits from your retirement age (usually 66 or 67, depending on your year of birth) up to age 70, your benefits increase by 8% – a return that you can expect. it's hard to beat anywhere else.

When weighing the weight of investments in your decision, do not forget the value of social security benefits compared to riskier asset classes.

"You will never benefit from a Social Security benefit losing 40% in a stock market crash," said Elsasser.

According to Doug Lemons, Social Security Expert and Chartered Financial Planner, many people make the mistake of comparing the benefits of Social Security to the average performance of Standard & Poor's 500.

"You really should not be using this kind of rate of return for social security benefits," Lemons said. "The risk of benefiting from social security is much lower, based on the full confidence of the US government, while the S & P is very risky relative to that."

Instead, try to compare your social security benefits to Treasury securities protected against inflation, said Lemons. Like social security benefits, TIPS is fully inflation-protected and backed by the faith and credit of the US government.

And do not forget that if you claim Social Security early and continue to work, your benefits may be reduced or taxed at a higher rate, said John Piershale, Financial Advisor at Clarity Group Midwest.

By delaying benefits, you not only avoid these taxes, but you also allow your individual benefit to grow.

Each year, the Social Security Administration adjusts its benefits to keep pace with inflation. In 2019, benefits increased by 2.8%.

The adjustment varies each year and some years have not increased. According to Elsasser, the expected median cost of living adjustment is 2.6%.

If you include these increases in your calculations, you will get larger numbers that will look more impressive, Elsass said.

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"This will tilt the calculation and breakeven to give the impression that delaying is more beneficial faster," said Elsasser.

The solution: do not include these increases in your calculations.

"If you want to do a break-even analysis yourself, do not include cost-of-living adjustments," said Elsasser. "If someone else is doing a breakeven analysis for you, be aware that these numbers look huge and that is why a lot of people are using them."

If you are married, you have to be very careful about profitability calculations.

"For a married couple, thinking in terms of breakeven is actually dangerous," said Elsasser.

Someone who is married and who looks at the break-even point says, "I think I should claim earlier because I'm not sure I have a life expectancy long enough to break my break-even point." "said Elsasser.

"There are many things in my statement in this statement, which means that the impact of my decision on my wife is not in question," Elsasser said.

If you are married, your spouse should be an important factor in your claim decision. Indeed, starting benefits earlier may also reduce your spouse's benefits if he or she intends to include it on your work record.

The time that you and your spouse plan to live should also be taken into account when choosing a strategy.

"I would not let him guess," said Piershale. "It's just not so easy to understand by being intuitive.You should really put the pencil on the paper and throw some numbers."