Transcription
The Social Security break-even age that every calculator shows you, it's a lie. And I'm going to prove it to you in this video.
If you're planning to wait until age 70 to claim Social Security, there's a 95% chance you'll never actually break even. Let me show you why.
Every Social Security calculator on the internet shows the same break-even age. Somewhere between 78 and 81, depending on when you claim, they all tell you to wait until 70 to maximize your benefit. But there's a massive problem with this calculation, and understanding it could save you hundreds of thousands of dollars over your lifetime.
So, let me show you what every calculator is showing you. On the screen here is a pretty typical export from a financial planning tool. This is someone who's 65 years old, single, it's a male, and if they claim Social Security right now at age 65, they would get $2,383 per month. But if they wait until age 70, which you can see over here, that benefit would grow to $3,410 a month.
Now, the software says that the break-even point is 16 years from now, which would be at 81 years old for this gentleman. Simple math, right? Wait 5 years from 65 to 70, then claim you get an extra $1,000 and change a month. And if you live past 81, the math ends up in your favor and you win.
But here's the lie. This break-even calculation assumes that money sitting in your portfolio earns nothing. Zero, 0%, zilch, right? Think about that for a second. If someone delays Social Security from 65 to 70, what actually happens? That person has to live off of some source of funds. Correct?
Now, look at this sheet right here. This is what we call an adjusted withdrawal sheet. If this person wants to spend $100,000 a year in retirement and they claim Social Security at 65, they would take about $71,000 out of their portfolio and get the $28,000 balance of that, what they wanted to spend, from Social Security.
Now, if they wait until age 70 in this second scenario right here, then they would have to pull the entire $100,000 from their portfolio for that 5-year period while they wait to claim at 70. Now, that's an extra $28,000 a year they get spent out of their portfolio. That's about $140,000 in total that if they claim earlier, stays invested and keeps growing if they claim at 65.
Now, here's where things get interesting. What happens when we use real math? Here's what most people don't actually understand, right? A dollar today is worth more than a dollar tomorrow, even after inflation, because a dollar today can be invested and grow. And financial planners call this concept the time value of money.
When we factor this in using what's called a net present value formula, watch what happens to the break-even age. And this third spreadsheet here is a net present value calculator. What I have it set here is when we put a discount rate, which is the rate of growth we might expect on the dollars that stay in the portfolio, if we can use Social Security to fund our lifestyle, then it will turn yellow at some point on this timeline when we have the break-even rate, the break-even age.
So if we have a 4% discount rate, meaning we're getting a 4% rate of growth on our portfolio while we take Social Security, then the disc—the break-even age for this person when they claim at 65, were they to claim at 70, would be here at age 87. So it's not the age 81 that you're shown in the first image that we showed. It's actually at age 87.
When we change this discount rate and say maybe you're getting a pretty conservative still rate of return of 5%, your break-even age for this gentleman all of a sudden jumps to age 90. And when we toggle this to age—to a 6% discount rate, this person's break-even age doesn't even occur before age 95. In fact, I know it happens at age 96. And that's actually reasonable to expect for a balanced portfolio over the long term, that 6% discount rate.
Now, here's the real gut punch, right? According to Social Security's own life tables, here's the reality for a 65-year-old man. Their chance of living till 87 is about 33%. Their chance of making it to age 90 is about 21%. And their chance of reaching 96 is less than 5%.
So, let me say that again. You—you'd be betting your entire retirement, or a big portion of your retirement funds, on something that has a 95% chance of never happening, which is potentially living till age 95 in order to get the break-even or the payout of delaying claiming Social Security till age 70.
Now, the question is, would you take that bet with your money if you had a 5% probability of success and a 95% probability of failure?
Now, here's another problem. If you delay Social Security, meaning wait till 70 in this scenario, you're pulling $143,000 from your portfolio in your most vulnerable years. They're right at the start of your retirement, while you have the longest retirement lifespan. And one bad market event during that window, it can destroy your entire plan. And this is what's called sequence of returns risk. And it's real.
But here's what no spreadsheet can really capture. At age 65, your money is also worth a lot more to you than at age 90 because you can buy the things you want to buy as opposed to buying the things that you need to buy. So, let me explain this in reality. At age 65, you can climb castle steps in Ireland. You can spend a couple weeks in an RV with your spouse. You can get down on the floor and build Legos with your grandkids. At age 90, you're not building Legos. You're just trying to remember to take your medication or have someone take care of you. And you're optimizing for the wrong phase of retirement, right?
So, here's a three-step framework that you might want to screenshot to use to determine when to claim Social Security. The first step would be determine your discount rate. That depends on your expected investment returns. You could say that a conservative investor could use a 4% rate of return, a discount rate. A balanced investor might use a 5% discount rate. And an aggressive investor maybe uses a 6% rate. If you're not sure, talk to your financial advisor, ask your CPA, get counsel. This is not financial advice, but the first step would be to check your discount rate.
The second step here would be to check realistic life expectancy tables. The Social Security um administration actually provides this. They provide actuarial tables that show the probability that you'll live to a certain age based on your current age. According to that table, a 65-year-old man has about a 20% chance of reaching age 90. For a female, it's about 32%. The point here is be honest with yourself about your health and your family history and about your expected longevity.
The third step here would be to stress test what's called your bridge years. The bridge years are the years where you're living only on your portfolio and don't claim Social Security. The question here is, can you actually afford to pull exclusively from your portfolio for 5 years without destroying your plan if the market crashes? Beyond that, the question would be, can you live a lifestyle that would be enjoyable and worthwhile and rewarding without having Social Security to buff up your spending while you're still young enough to enjoy that time period?
So the key here is running your numbers with your assumptions. And so look, claiming Social Security isn't really just picking a start date. And it's not even just about the math, right? Standard break-even math will often tell you to wait until age 70. But the real break-even math that includes these time value of money calculations and what we call net present value calculation says you'll probably unlikely to break even by delaying. The difference is potentially hundreds of thousands of dollars that you'll actually get to spend versus money you might never see.
If you want the exact four-step system that we use at Peak Financial Planning to optimize Social Security and retirement spending decisions without relying on misleading break-even ages, I put together a free webinar. The link is in the description below this video. Thank you for your time and attention. I'll see you in the next video.