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Why Bother with Social Security Break-Even Calculations?

Broadly speaking, there are two general ways to assess the Social Security decision:

  • You can look at it as an insurance question (i.e., do I want to buy insurance against longevity risk), or
  • You can do a break-even analysis (i.e., how long do I have to live before I come out ahead as a result of delaying benefits).

An argument I’m seeing more and more often in financial publications is that it’s a mistake to even bother with a break-even analysis and that people should instead look at the question solely from the insurance perspective.

From the insurance perspective, delaying Social Security is automatically a good move because it creates an ideal alignment of outcomes. That is, it works out well in scenarios in which you live to be quite old. And those live-a-long-time scenarios are the ones that are the most financially scary. Conversely, delaying Social Security works out poorly in situations in which you die early in retirement, but those are the situations in which you are unlikely to run out of money anyway. I agree that this is an important point to consider in your Social Security planning.

But I still think break-even analysis is useful — for two reasons.

Firstly, just because something reduces risk doesn’t mean it’s a good deal. For example, most financial experts don’t recommend purchasing an extended warranty when you buy a new TV. Yes, it reduces a risk (specifically, the risk of having to replace your TV within the particular extended warranty time frame), but the degree of risk reduction is too small relative to the cost.

As it turns out, delaying Social Security is usually a good deal (especially for the higher-earning spouse in a married couple). But there’s no way to know that until you do the math yourself or read somebody else’s analysis.

A second reason is that, for some people, the reduction in longevity risk isn’t terribly important (or, at least, it isn’t their only concern).

For example, if your standard of living is already quite safe (e.g., because your spouse has a government pension that satisfies your desired spending level or because your portfolio is large enough to satisfy your desired spending level with a super low withdrawal rate), you have no need for longevity insurance. As a result, your goal with Social Security planning should simply be to maximize the total dollars at your disposal during your lifetime. And for those purposes, break-even analysis is a very useful tool.

And many people are somewhere in the middle. They are concerned about maintaining their living standard, but they’re also interested in leaving money to heirs. So it makes sense to look at the question from both perspectives.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security cover Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."
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