Deciding when to claim Social Security is one of the most consequential financial choices most Americans will make.
This decision affects not only your monthly retirement income but also how long your retirement savings will last and how much flexibility you’ll have in those early, active years after leaving work.
Many financial advisors lean on the so-called “breakeven date” to optimize this timing. In theory, if you can delay your Social Security to a sweet spot, you could maximize the total benefits you enjoy over the course of your retirement.
However, this simple breakeven date calculation could be missing some important elements that might leave you with a significantly worse quality of life in retirement.
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The pitfalls of breakeven dates
The Social Security breakeven date is the point at which the total value of all the benefits you have collected matches the benefits you would have collected if you applied for Social Security earlier.
For most people, delaying benefits from 62 until full retirement age means experiencing a breakeven somewhere in their late 70s or early 80s. After that point, the longer you live, the more financially beneficial your decision to delay benefits would be.
For example, a 60-year-old earning $75,000 a year who decides to delay benefits until the full retirement age of 67 to receive a total of $2,546 per month would break even at the age of 78.4, according to one generic online calculator.
However, this simple calculation ignores one key element: opportunity cost.
Opportunity cost
The simple breakeven calculation assumes that your retirement portfolio earns 0%, which is unrealistic.
If you decide to retire at 62 but delay Social Security benefits until 70, you face eight years of steadily drawing down your retirement savings to bridge the gap. These funds could have been growing and compounding in either the stock or bond markets.
Withdrawing these funds also potentially exposes you to taxes on capital gains, based on the account type.
Depending on how big your benefit check would be, your tax bracket and the rate of return you expect your portfolio to generate, your total opportunity cost could be tens of thousands of dollars.
One way to avoid this opportunity cost is to simply work longer. However, spending the bulk of your 60s at work also has a downside on your retirement quality of life.
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Quality of life
Retirement in your 70s or 80s is unlikely to be as enjoyable as it would be in your early 60s. As you age, your health deteriorates and you’re more exposed to chronic illnesses or physical limitations.
By the time you reach 70, you may no longer be able to fully enjoy retirement, and it will likely be more expensive to get insurance to travel abroad. While the average life expectancy in the U.S. is 76.4, the healthy life expectancy is only 63.9, according to the World Health Organization (WHO). (1)
If you’re already struggling with health issues, your longevity could be shorter than expected. A healthy man at age 60 has a 20.3% chance of living to the age of 85, according to research published in the American Economic Review. (2) By comparison, an unhealthy man at age 60 has only a 14.5% probability of living to age 85.
Obviously, nobody knows how long they will live. However, it seems foolish to plan for a breakeven age in your mid-80s if your chances of living that long are less than one in seven anyway.
If you have reasons to believe you won’t likely live beyond the average life expectancy in the U.S., you might be better off quitting work earlier and applying for Social Security benefits sooner.
That’s not to say you should take benefits as soon as you qualify. But keep your opportunity cost and quality-of-life factors in mind while you determine the right age for you.
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Article sources
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World Health Organization (1); American Economic Review (2).
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.