What everyone gets wrong about Social Security’s Breakeven Age

In an article I recently shared, I showed how your Social Security benefit statements are wrong in a good way. Your actual benefit amounts are going to be substantially bigger than the benefit amounts that appear on your statement. If you haven’t read that article yet, go back and read it. I think you will be happy to learn that your actual benefit are going to be bigger than you think. This is because of the Breakeven Age.

Good News about your Breakeven Age

Now I have more good news for you -- especially if you are thinking of delaying the claiming of your benefits.

The good news is that your Breakeven Age is even younger than you think. Depending on how high the rate of inflation is (which also determines the rate of annual Social Security COLA increases) that can have a significant impact on decreasing the Breakeven Age between claiming at a later age compared to claiming at an earlier age. Basically, the higher the annual COLA increase, the younger the Breakeven Age. Let me show you what I mean.

Rate of Inflation

Social Security assumes that future rates of inflation and COLA increases will be 0%.

In other words, if you are currently age 62 and thinking of claiming your Social Security at 67, the age 67 benefit amount on your statement assumes that the annual COLA increases over the five-year period will be 0%.

If you were planning on delaying the claiming of your benefits until age 70,  the age 70 benefit amount on your statement assumes the annual COLA increases  from 62 to 70 are also 0%.

Even if the annual COLA increases averaged 2.5% over that five-year period from age 62 - 67, or the eight-year period from age 62 – 70, your actual benefits will be substantially bigger than the benefit amounts that appear on your statement. If the average annual COLA increases were bigger, like 3%, 4% or even 5%, over those periods of time, that will increase your actual benefit amounts even more.  

That also explains why everyone calculates their Breakeven Age incorrectly.

When calculating their Breakeven Age everybody uses the benefit amounts that appear on their Social Security benefit statement. Now we know that those benefit amounts are too low, and your actual benefit amounts will be substantially bigger. If you use the benefit amounts that appear on your Social Security statement, you will incorrectly calculate your Breakeven Age.

Why do people calculate the Breakeven Age in the first place?

If someone wants to delay their benefits until 67, that benefit amount will be bigger than what they would have received at 62.

Even though their age 62 benefit is smaller, they would start receiving those benefits five years earlier at age 62. Instead of waiting until they were age 67 to start receiving benefits.

If they delay claiming until age 67, their monthly benefit will be bigger than their age 62 benefit. But how many years will it take to make up for those 5 years of benefits?

Calculating the Breakeven Age

The Breakeven calculation is fairly simple.

Add up the total amount of Social Security income you would receive from age 62 to age 67.

Then, you divide that amount by the monthly difference between your age 67 benefit and your age 62 benefit.

The result will be the number of months it will take to Breakeven.

You then divide the number of months by 12. This results in the number of years that you add to age 67 and the result is the Breakeven Age.  

How do people calculate the wrong age?

A key number in the equation is the monthly difference between their age 67 benefit and their age 62 benefit.

That monthly difference is divided into the total amount of Social Security income they would receive from age 62 – 67. The result is the number of months it would take to breakeven.

When making the calculation, if they use the age 67 amount appearing on their Social Security statement, that amount is too low. This makes the monthly difference between their age 67 benefit and their age 62 also too low. This results in an erroneous calculation of the number of months it will take to Breakeven. The number of months to Breakeven is too high.

It doesn’t matter what age you claim. If you use the benefit amounts on your Social Security statement, the Breakeven Age you calculate will be incorrect. It will be too high.

How COLA lowers the Breakeven Age

Let me give you an example of how the rate of annual COLA increases can lower the Breakeven Age.

For this illustration I used my “Claim With Confidence Social Security Calculator”.

Example with John Doe

I ran the analysis for John Doe. He had a date of birth of 8/4/1961 and a Full Retirement Age benefit of $3,000 per month. Don’t get caught up on the benefit amount of $3,000. The results would be exactly the same if John’s Full Retirement Age benefit amount was significantly less per month. 

I ran three different analysis for John Doe.

With the first analysis, I assume an annual COLA increase of 0%. This would be the same as using the benefit amounts that appear on John’s Social Security benefit statement.

With the second analysis I assumed an annual COLA increase of 2.5%.

And with the third analysis I assume an annual COLA increase of 5%. 

No matter what the assumed annual COLA increase, the age 62 benefit amount is the same. It would be reduced to only $2,100. But there is a big difference between the age 67 and 70 benefit amounts depending on the assumed annual COLA increase.

Chart 1

           0%                         2.5%                 5% 

Age 67:    $3,000            $3,394            $3,829

Age 70:    $3,720            $4,532.           $5,496

 

I think you can see why assuming the annual COLA increase is 0%, the Breakeven Ages calculated will be too high.

If the annual COLA increases average 2.5%, the benefit amount of $3,394 should be used. Not the $3,000 benefit amount that appears on their Social Security benefit statement.

The same is true if the annual COLA increases were to average 5%. In that case the age 67 benefit amount of $3,829 should be used instead of $3,000. The discrepancy between the benefit amounts is even bigger if they wait until age 70 to claim. The age 70 benefit with a 0% annual COLA increase that appears on their Social Security statement is only $3,720. While their age 70 benefit grows to $4,532 with an annual COLA increase of 2.5% and $5,496 with an annual COLA increase of 5%.

What is Fair to Assume for COLA Increases

Please don’t think that an annual COLA increase of 5% is an unreasonable assumption. Because there have been numerous times in our history where inflation has average 5% or higher over a 10 – 15 year time period.

In fact, the Social Security COLA increase in 2022 was 5.9%, and the COLA increase for 2023 is 8.7%. We could be at the start of one of those extended periods of time of higher inflation and higher annual Social Security COLA increases. Only time will tell.  

With each case I looked at the Breakeven Ages, here are the results:

Results

Once again I want to emphasize that the assumed annual COLA increase of 0% would be the same benefit numbers that appear on your Social Security benefit statement.

 

              0%                                        2.5%                                    5%

1. 67/62 – age 78          1) 67/62 – age 76           1) 67/62 – age 74.5
2. 70/62 – age 79          2) 70/62 – age 77.5        2) 70/62 – age 76
3. 70/67 – age 81          3) 70/67 – age 79           3) 70/67 – age 78                

 

Number 1:

It shows the Breakeven Ages between claiming at age 67 compared to claiming at age 62.

In other words, if John claimed at age 67, how long would it take to make up for the five years of income he did not receive had he claimed at age 62? With 0% annual COLA increases (Social Security statement), it would take him until age 78.

If John lives beyond age 78, he will receive more total Social Security income if he claims at age 67, instead of claiming at age 62.

But if annual COLA increases average 2.5% per year, it decreases John’s Breakeven Age to age 76. If the annual COLA increases average 5%, that would decrease John’s Breakeven Age to age 74.5.

Number 2:

It shows the Breakeven Ages between claiming at age 70 compared to claiming at age 62.

With assumed annual COLA increase of 0%, the Breakeven Age is age 79, with an annual COLA increase of 2.5% the Breakeven Age is 77.5 and with an annual COLA increase of 5% that lowers the Breakeven Age to 76.

Number 3:

This compares the Breakeven Ages between John claiming at age 70 compared to claiming at age 67.

With a 0% COLA, the Breakeven Age is 81, a 2.5% COLA lowers the Breakeven Age to 79 and a 5% COLA lowers the Breakeven Age even further to 78.

 

To sum things up:

When compared to using the benefit amounts that appear on your Social Security statement, assuming an annual COLA increase of 2.5% will lower the Breakeven Age by approximately 2 years. And an assumed annual COLA of 5% will lower the Breakeven Age by 3 – 4 years.

Please note that the longer you live, the farther out you push your life expectancy.

If a man lives to age 62 and is in relatively good health, he pushes his life expectancy out to age 84.

Let's say a woman lives to age 62 and is in relatively good health, she pushes her life expectancy out to age 86.

If you have a Breakeven Age in the mid 70s, then you have a much higher probability of living up to and beyond your Breakeven Age than dying before that age.  

 

Basically, the higher the rate of future COLA increases, the lower the Breakeven Age.

The probability is very high that we will experience some amount of future inflation and future COLA increases. That being the case, if you are using the benefit amounts that appear on your Social Security benefit statement, you are calculating your Breakeven Age incorrectly, you are calculating a Breakeven Age that is too high.