Social Security Break Even – Podcast 475

by | Mar 28, 2024 | Podcasts

Social Security Break Even – Podcast 475

Casey, Brendan and Tom discuss social security break even analysis in podcast episode 475.  The guys also discuss a flow-chart to help folks decide on social security break even points.  This is an exercise many people ought to consider before filing for their social security benefits.   Both items were provided through the JP Morgan Guide to Markets, a report we find very useful at Mullooly Asset management.  This report can be found in the links below.

And just because we are not “all-work, no-play” – the guys end their conservation (recorded on the eve of the 2024 baseball season) with early prediction on the NY Mets and their upcoming season.

Social Security Break Even – Podcast 475 – Links

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Social Security Break Even – Podcast 475 – Transcript

Hello and welcome back to the Mullooly Asset podcast. This is episode 475.

I’m your host for today, Casey Mullooly. We’ve got Tom and Brendan here.

Guys, it’s been a while since we’ve all been around the conference table recording a podcast, so thanks for joining me.

You’re welcome. Let’s dig in.


And it feels so good. Yes.

So, we are going to be referencing the “JPMorgan Guide to the Markets.” They release this quarterly. They summarize what’s been going on, what they’re seeing in the trends in the markets, and in the retirement landscape. They put together some really great charts. So, we’re going to walk through a couple of them here.

The first one that I want to touch on is the Social Security break even point chart.

This shows three different scenarios of claiming Social Security:
1. Claiming at age 62, which is the earliest you can claim;
2. Claiming at full retirement age; and then
3. Claiming at age 70.

If you wait until age 70, that is when you’re going to get the most, you’re going to get the highest payout per month. But the trade-off is you have to wait seven or eight years until you have that income.

The chart shows that the social security break even point for claiming at full retirement age versus claiming at age 62 is at age 77, you would break even.

Claiming at full retirement age, you’d get, in this example, you get $3,800 a month; claiming at 62, you get $2,680 per month. So the social security break even is at age 77.

And then, if you claim at age 70; versus claiming at full retirement age, the social security break even point is at age 81.

What do they mean by social security break even point?

It’s a point in time where you have more money for having waited versus collected sooner. It’s where that higher benefit has been enough – for long enough – to have gotten ahead of where you might have been taking the lower amount and collecting it sooner.

Unfortunately, it’s hard to make this decision because it is based on longevity. It’s based on how long you live, and you don’t know that going into it, but I think that we can pretty safely say that in most cases, at least referring to the averages, if you’re a married couple, at least one of you is going to make it into your eighties.

It’s a really good bet that I think surface-level analysis almost always begins with this social security break even and then saying, “I don’t know how long I’m going to live, so why would I bother waiting?” And that is definitely one aspect of the decision.

On the other hand, you’ve got to consider what other factors play into your situation.

I know there was another chart that was kind of like a flowchart of the way that maybe you want to think through a decision like this that I thought was super helpful because you can do the social security break even thing in a vacuum. And I just don’t think that that’s how you want to make this choice, because there are other aspects of it.

I understand not knowing how long you have left. But I think for a lot of folks, if you just look at the pure dollars, in this example, $2,680 a month if you turn it on at age 62. You get $3,800 if you take it at full retirement age. But man oh man, if you can hang in there until age 70, you’re talking about $4,748 a month. That is significantly higher. I mean, that’s $2,000 a month more, just on one person, let alone if you’re married, you’re collecting two checks per month.

It depends on what you’re doing in the interim amount. Like, can you afford to do it? And then, if you can, do you want to? Some people will suggest, as a reason for taking it sooner, that social security is not something that you can leave to somebody (aside from your spouse). And even that is kind of because if you had the higher benefit and your spouse outlives you, then they can get their benefits stepped up to what yours was. But they’re not getting yours in the sense of inheriting alongside their own.

So there’s a step-up there but not the full amount. And some people will say, “I’d rather grab this money that I’ve paid into and comes from a combination of that and a promise from the government. And preserve assets to leave to the next generation. Because you can’t necessarily do that with your social security.

So maybe, from that perspective, there’s a lot to think through in terms of what assets you’re willing to use and when, and people have different priorities, sure.

Sometimes half a loaf is better than none.

I mean, taking it at 62, you could look at it from a required rate of return standpoint too. Because I think those numbers, if you boil them down, every year you wait, you’re going to get an 8% higher payout every year between age 62 and 70.

So when you compare that, if you wanted to compare that to an investment return, long-term averages, I think anyone would take 8% per year guaranteed. That’s a pretty smooth and nice rate of return. So, you have to balance that with what kind of risk you’re taking in an investment portfolio to generate 8% per year returns and whether that risk is worth taking or not.

But let’s jump over to the flowchart.

I know Brendan, you mentioned it. And I thought it did a really good job of simplifying and making this social security decision seem probably easier than it is for a lot of folks.

The first question that they ask us to consider is, “Are you working?”

If you are, you should delay claiming your Social Security, particularly if you’re subject to the earnings test.

Brendan, chime in on this one. How many people have we talked to who have said, while they’re still working, “next year I’m turning 62 and I’m going to start collecting social security.”

And we’re like, “Whoa, whoa, whoa, wait a sec! Do you realize what you’re doing?”

You know, and assuming, I suppose, that what they’re collecting from employment is sufficient to support their lifestyle. And there’s not a need. And that there’s some other reason for them wanting to take it that soon. You probably want to rethink that. Just because the earnings test is basically you have some of your social security benefits held back until you’re past your full retirement age.

For dollars that you earn above the threshold that the earnings test is alluding to, which is around $18,000, $19,000, $20,000 per year. So if you’re earning sufficient income from employment that’s above that threshold and you want to collect, you’re not going to get the amount that’s on your statement.

Because they’re going to take some of that back. And it will adjust in the future after you hit your full retirement age. But it’s a reduction of your already reduced benefit. And I struggle to think of a situation where that would make good sense to do it from a financial standpoint.

The next question in the flowchart here is, “Do you have other sources of income?”

If you don’t, you should consider claiming your benefit. If you do, there is another question, “Do you prefer receiving a smaller benefit earlier versus waiting for a larger benefit?” So I think we touched on the benefits of delaying versus claiming at 62.

Do you guys agree that if you don’t have any other sources of income, you’re not working, you don’t have any assets to draw on, that you should claim Social Security at age 62?

I mean, what else are you doing?

You’re not working, so you’re forced into that decision there.

So this other question, “Do you prefer receiving a smaller benefit earlier versus waiting for a larger benefit?”

If you do want to claim your benefit, you should understand what you’re leaving on the table at an older age. Which I think we covered that. And then, if you answer no to that question, then the next question in the flowchart is, “Do you want to claim your benefit to preserve your investment portfolio?”

So basically, take Social Security instead of tapping into a 401(k) or an IRA, something like that.

I think a consideration there is that this is where you’ve left the realm of “Hey, I have a financial need and I’m going to claim.”

Which is, of course, like, I think that makes fine sense. I think all the stops along the line after this are thinking of ways to maximize what is probably already a pretty good situation. Like, if you’re asking these questions, you’re in better shape than a lot of people.

And so taking the time to consider what’s going to make the most financial sense from here kind of gets into the weeds. And the first stop is what we already talked about, which is the social security break even calculation.

That’s like the first thing that everybody does. And then beyond that, I think what you want to begin to consider with this stage is things like your tax situation in the future.

Obviously, you’ve got to do a little bit of estimating to get there. But if you’re making a decision like this question asks in terms of “Do you want to preserve your investment assets by taking it sooner?” you should be also thinking along the lines of the tax ramifications of making that choice.

What I mean by that is, in particular, if you have pre-tax retirement accounts that you don’t want to begin collecting from in your sixties and you’d rather take your social security, that’s fine. But I think by doing that, you may be giving yourself a higher tax rate in the future than you might have otherwise had.

And that’s where you need to start making some reasonable estimates, and it’s the sort of thing that we help folks think through. Because I think it’s a little bit beyond just the basic math of social security break even, which basically anyone can do. That’s not difficult to figure out.

So the higher tax bill is because they’re going to be required to take the money from their pre-tax account. They’re going to be required to take minimum distributions from those accounts starting at age 73.

Right. So you’ve run into a situation where, on one hand, Congress is doing people a favor by saying, “We’re going to move the goalpost for required minimum distributions.” It used to be 70 1/2, up to last year when it was 72. Now it is 73. And at a later date, in about nine years, it’ll be 75.

The problem is that folks who are turning 73 and need to take their first required minimum distribution now have shorter life expectancy, and they may have had three, four, five more years of additional compounding. And so their required minimum distribution may be larger than they expect. Which would mean more taxable income.

And they’re not going to have control over that either. So I think that’s kind of the point of going through that exercise is deciding, “Do you want to control your tax bill now — or have no control over it later, after you’re required to start taking this money out?”

The difference may be nominal, but I think you need to do the math and say, “Hey, if I need $40,000 a year, I can get it from Social Security now. But what is leaving my IRA alone for the next eight years look like in terms of my expected RMD — in the future? Versus if I took that $40k for some of these years now, I’m going to have a little bit less in the future in terms of what it turns into my RMD, assuming the same rate of growth.

You can run both scenarios out and see how much it might reduce your future RMD to begin collecting now from your IRA versus from Social Security. Because there are taxes about Social Security too.

At least running the numbers to see what the difference would be, could help you decide whether it’s enough that it moves the needle for you. And helps you make that decision. Or if it isn’t and you’re going to make it based on other factors that are out there. But I think doing the numbers is a helpful way to flush that out.

Yeah, I also think that when we get into these kinds of conversations, it’s always a good reminder to just talk about the difference between the marginal tax rate and the effective tax rate.

I know this is a topic for another podcast, and we’ve already done episodes on it.

But I think a lot of people just lose sight of the fact that the next dollar that you take out of a retirement plan is going to be taxed at whatever your marginal tax rate is. If that’s 35%, that’s a significant chunk.

One of the things that we talk about when helping folks make this Social Security decision is that turning it on is a “one-way door.” You can’t go back through it. So once you turn it on, you’re locked in for that amount.

And I think one of the benefits, besides the dollars and cents benefit of delaying Social Security, is that it keeps your options open. And allows you to explore different avenues. So you’re not locked into a tax path for the rest of your time.

Just to wrap up this flowchart, the next couple of questions are, “Do you expect to live beyond age 77?”
If you don’t, you should take Social Security at age 62.

If you do expect to live beyond age 77, “Do you expect to live beyond age 81?”
If you don’t, you should take it at full retirement age.
If you do, you should wait until age 70.

So that goes back to the social security break even analysis that we first started talking about at the beginning of this episode. The idea is if you don’t think you’re going to make much beyond 77, then if you turn it on at 62, you’ve got 14 or 15 years of income coming in.

If you don’t think you’re going to make it beyond 81 and you turn it on at full retirement age, say 67, now you’ve got 13 or 14 years at a minimum of collecting Social Security. In the same way with if you think that you’re going to live beyond 81, and all of us want to; now we’re talking about 11 or 12 years of collecting Social Security if you turn it on at 70.

I think a way to consider that is maybe counter to the social security break even calculations is thinking of it as “old age” or “longevity” insurance. In the sense of nobody can really answer those questions of how long they expect to live, barring health circumstances right now in the present, that give us a better idea than the average person of what might go on.

So you can’t answer those questions with 100% certainty. It’s a guess, and I think you can look at base rates. But short of that, especially if we’re talking about a married couple, we know what the base rates are of somebody of the married couple making it into their eighties and even approaching and into their nineties. And thinking of at least one of you delaying as long as possible as a hedge against living that long. And what it might mean financially for you as a married couple.

I think is an interesting reframe of a decision that often isn’t viewed in that way.

There is lots of speculation about future changes to Social Security. But we have to work with the information that we have now. And presume that it’s going to be status quo going forward. But things change. The same way with estate planning. You know, we have to work under the current set of circumstances. There’s a possibility that things may change in the future.

So that is the Social Security discussion for this week.
Guys, it was good to be back doing this with you.

We are recording this a day before Major League Baseball’s opening day.
Opening Day Eve! Well, for those who celebrate.

And a little tradition we have here in the office is we like to make “win total” predictions for our beloved Mets.

Last year, we were all probably way over – due to the very disappointing season that they had.

But hit me with your “win total” predictions this year for 2024.

I think Tim came in first, before we turned on the mics. Tim came in first and said he is going for 85 wins and the third NL Wild Card spot. Which seems to be a pretty safe consensus play.

What do you guys have?

(Brendan) I do not have an S\&P 500 price target, but I’m going to guess how many games the Mets will win. Because I think they’re both about as useful. I think the Mets are going to win 79 games, and it’s not going to be a fun year.

(Tom) Me, 91 wins in Queens!

(Case) Surprisingly. 91. So they make the playoffs with that?

(Tom) Yes, they do. I think they finish ahead of the Phillies too.

(Case) Okay. So second place in the NL East, right? Behind Atlanta. Okay. So in one of the three wild card spots?

(Tom) Yes.

(Case) Okay. So you think no playoffs?
(Brendan) Nah. Not with this pitching. 79 wins would probably put them third, maybe behind Atlanta and Philly in the division. Yeah. Okay. Missing the playoffs.

(Case) What do I think? I think I am going to go with 88 wins. A little bit better than anticipated. I think some of these young guys are going to come up and produce, specifically the pitchers. We’ve got a good crop of young pitchers coming up. They’re going to surprise everyone and contribute more to the Mets this year than we thought they would.

So that is going to lock them into second place in the NL East and put them for the second wild card in the NL. They would have a matchup against one of the division winners, but I like our odds.

(Tom) You know what, I don’t think they were as good as a 101 win team in 2022. I don’t think they were as bad as they were last year, 79 wins. I think that’s right. Just regression to the middle. Yeah. 91. See you in September!

We’ll check back in October now, I think. But we’ll check back then, and thanks for listening to this episode of the podcast. We’ll see you on the next one.

Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment advice.

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