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Lisa Weston, Published February 18 2014

Money talk: Don’t obsess over Social Security break-even point

Q: I read your recent article in which you advised waiting before starting Social Security benefits. Is this good advice for everyone? You probably know that there is a break-even age around 85, so that if you die before 85, starting benefits early is better, but if you die after 85, starting late is better. “Better” means you receive more money. So, right off the bat the advice to delay is wrong for half the people in their 60s, since about half will die before the crossover, and if they had delayed, they lost money.

A: The problem with do-it-yourself financial planning is that people often focus their attention too narrowly and ignore the bigger picture.

Obsessing about the break-even point – the date when the income from larger, delayed retirement benefits outweighs what you’d get from starting early – is often a mistake, financial planners will tell you. There are a number of other considerations, including the value of Social Security benefits as longevity insurance.

If you live longer than you expect, a bigger Social Security check can be enormously helpful later in life when your other assets may be spent.

You can change that break-even point by making assumptions about inflation and your future prowess as an investor, but remember that the increase in benefits you get each year by delaying retirement between age 62 and 66 is about 7 percent. It’s 8 percent for delaying between age 66 and age 70, when your benefit maxes out. Those are guaranteed returns, and there’s no “safe return” anywhere close to that in today’s environment.

Don’t forget that those benefits will be further compounded by cost-of-living increases. One researcher published in the Journal of Financial Planning found that an investor would have to achieve a rate of return that exceeds inflation by 5 percent to justify taking benefits at 62 rather than at full retirement age.

“At higher inflation rates and/or higher marginal tax rates, the rate of return may need to be even higher, perhaps in excess of 7 percent or 8 percent above inflation to justify taking benefits at age 62,” wrote Doug Lemons, a certified financial planner.

Q: Recently I’ve paid off almost $20,000 in credit card debt and am determined not to go down that path again. Because I haven’t used these cards in a while, though, I’m starting to get notifications from the credit card companies that they’re closing my accounts because of inactivity. I know having long-standing accounts on your credit report is a good thing, but I don’t want to be tempted to use these cards just to keep the account open. Is it a bad thing if almost all of my credit card accounts get closed?

A: Your good histories with these cards should remain on your credit reports for years. But if you stop using credit entirely, eventually your credit reports won’t generate credit scores. That could cause you problems if you later want to borrow money (say, to buy a home) and could even affect your insurance premiums, since insurers use credit information as well.

It’s not too hard to keep accounts active without slipping into debt again. Simply set up a bill to be charged automatically to each account, then set up automatic payments with the credit card issuer so the full balance is taken out of your checking account each month.


Liz Weston is the author of the book “Deal with Your Debt.” Questions may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com