By Philip Moeller
April 27, 2015

Social security is a great insurance policy. But sometimes people mistakenly regard it as just one more investment that they should try to maximize.

That kind of thinking might persuade you to take benefits sooner rather than later and can have a big impact on how much money you and your family receive.

Central to this problematic point of view is a breakeven analysis. Between the ages of 62 and 70, your benefits rise about 7% or 8% for each year you defer taking them. Wait until age 70, and your monthly benefit will be 76% higher, on an inflation-adjusted basis, than if you claimed at age 62.

Here’s the breakeven puzzle: Let’s say you wait to take Social Security so you can get a higher monthly benefit. How old will you be before the total value of your higher benefits catches up with the amount you would have received had you started taking Social Security years earlier?

Roughly calculated, the typical breakeven age is about 80½. Until then, you’ll get more money by taking benefits early. If you don’t spend those benefits but invest them instead, the breakeven age can be even higher.

So based on guesses about your lifespan and what you’ll earn by investing your benefits, you might think it best to take benefits early.

Why Breakeven Is Misleading

But this feels wrong to me. Once you start doing this breakeven analysis, you’re looking at Social Security as an investment on which you want to earn the highest return. And it isn’t an investment. Rather, Social Security is a gilt-edged insurance policy that protects you from a major risk: living a very, very long time—long enough to outlast your money.

Think about other types of insurance. You buy home insurance, for example, to protect against the possibility of damage or total loss.

If your home never burns down, is the money you spent on insurance premiums a loss? No. You pay for protection, not profits. That’s true for Social Security also.

The Ultimate Payoff

Social Security benefits are for as long as you live. The average 65-year-old will live about 20 more years; many people that age will live much longer (see the chart).

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Source: United States Life Tables, 2010, Centers for Disease Control and Prevention (November 2014)

Those benefits are immune to a stock market collapse. They rise to offset inflation. While most 401(k) and traditional IRA distributions are fully taxable, no more than 85% of Social Security payments are subject to federal tax, and most states don’t tax Social Security.

Finally, waiting to receive a larger benefit means that survivor benefits based on your earnings will be larger too. That helps your surviving spouse (if your spouse isn’t collecting a larger amount based on his or her own work record). This is terribly important for women, who on average outlive their husbands and are more likely to need survivor benefits. Breakeven analysis can turn out to be a bad break for them.

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and a research fellow at the Center for Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

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