What the Breakeven Age Measures
The breakeven analysis calculates the age at which the total dollars received by delaying benefits equals the total received by claiming earlier. Typical tables put this age in the late 70s to early 80s for most claiming age comparisons (e.g., 62 vs. 67 vs. 70).
Unfortunately, clients often treat this age as a bet or a gamble. For example, if a client’s breakeven age is 78 or 79, many conclude they should claim earlier because the delayed strategy doesn’t “win” until late in retirement.
Key Limitations Advisors Should Consider
1. Longevity Risk
A top concern for retirees has consistently been outliving assets. While understanding the breakeven age can be beneficial for clients with health issues or shorter life expectancy, it may have an unintended consequence for healthy clients who may benefit from delaying.
Focusing solely on the breakeven age frames the Social Security decision around the fear of dying too soon, while discounting the financial risk of living longer than expected—opposite of its core value of longevity insurance providing guaranteed, inflation-adjusted monthly income throughout retirement.
2. Survivor Benefits
When working with married couples, the decision to delay is often based on the higher earner’s benefit to not only improve overall household income, but to maximize the survivor benefit as well. However, a simple breakeven calculator is individual-centric and ignores survivor benefits altogether.
When discussing the breakeven age with couples, reframe the question to be, “What is the likelihood of at least one of you living past this breakeven age?”
3. Taxation of Social Security Benefits
Breakeven age calculations overlook the taxation of benefits. Within the Social Security taxation formula, benefits are counted at $0.50 on the dollar toward provisional income, while IRA withdrawals increase AGI dollar-for-dollar.
When higher Social Security benefits are used to cover a larger share of ongoing income needs, the need for incremental IRA withdrawals may decline—potentially reducing provisional income and limiting how much of Social Security becomes taxable.
Breakeven Age is Still Valuable
The breakeven age can be useful in broader planning. For example, I recently had an advisor reach out regarding a wife who was deciding when to begin her Social Security benefit.
The husband was already receiving SSDI and the wife was soon turning 62. The spousal benefit was higher than her own benefit, so we discussed whether it was better to have her start at 62 (receiving 32.5% of his amount) or wait until 67 (receiving 50% of his amount).
The breakeven age can be looked at in the same way for spousal benefits just like with retirement benefits. With the husband’s poor health, delaying the spousal benefit may not be the better choice because of the possibility of switching to a survivor benefit before reaching the breakeven age for delaying.
Bottom Line
The Social Security claiming decision is important, but one that shouldn’t be made in isolation. It really should be part of a comprehensive retirement plan. Advisors who elevate the conversation beyond a single number such as a breakeven age can help clients make informed decisions leading to a more secure retirement.