As you near retirement, you might be thinking about the best time to begin receiving your Social Security benefits. Your earnings primarily influence the amount you receive during your working years and the age at which you choose to commence payments. Although you can begin receiving benefits at 62, your monthly checks will be reduced. On the other hand, if you wait until a later age, your monthly payments will increase until you reach 70.
Your break-even age refers to the point where the total amount received by delaying payments becomes higher than what you would have received if you had started receiving payments earlier. Chuck Czajka, a certified Social Security claiming strategist and founder of Macro Money Concepts in Stuart, Florida, explains, “The break-even point is the most commonly used indicator people employ to determine when to collect benefits.”
When contemplating the ideal time to initiate Social Security, take into account the following factors:
- How to calculate your Social Security break-even age.
- Your personal and family medical history.
- Your spouse’s benefits and age.
- Your desire to continue working.
- Other sources of income.
Understanding the Social Security Break-Even Age:
Opting for early Social Security payments results in lower monthly amounts but provides the advantage of immediate income. Conversely, delaying payments leads to a higher monthly benefit, but it takes time to accumulate the same total revenue as starting early. The director of financial planning at Taylor Hoffman in Richmond, Virginia, Taylor Jessee, explains the break-even age as the point at which you benefit more by delaying the start of Social Security benefits.
By initiating benefits early, you receive reduced checks over an extended period while waiting for grants of higher amounts for a shorter duration. Ultimately, the strategy that yields a greater lifetime benefit depends on your lifespan.
Related article: What to Expect When You Turn 62 and Start Receiving Social Security
Calculating Your Social Security Break-Even Age:
To determine your break-even age based on your income, age, and expected benefit, you can employ an online calculator or seek assistance from a financial advisor. For instance, if your full retirement age is 67, entitling you to $2,000 per month, choosing to start at 62 entails certain tradeoffs. Jessee explains, “Your monthly benefit is permanently reduced by up to 30%.” Consequently, if you commence payments at 62, you will receive $600 less per month, resulting in a monthly benefit of $1,400.
However, this amount will be adjusted for cost-of-living adjustments.
By waiting until your full retirement age, you’ll receive the full $2,000 per month. Moreover, for every additional year you postpone claiming, your benefit will increase by 8% until you reach 70. Hence, initiating Social Security at 70 would yield a monthly benefit of $2,480.
Illustrative Break-Even Age and Lifetime Benefits:
Choosing to claim benefits at 62 would accumulate approximately $470,000 in total benefits until age 90. Opting for full retirement age would result in roughly $552,000 by age 90. Waiting until 70 would generate approximately $595,000 by the same age. Drew Parker, the founder of The Complete Retirement Planner, emphasizes, “If you start claiming at 62, it will take until just over age 80 to break even with what you would have received if you had claimed at full retirement age.”
Other Considerations Influencing Your Social Security Decision:
While break-even calculations can provide guidance, there are additional factors to consider. Jessee notes, “If everyone knew how long they’d live, timing Social Security would be a piece of cake.” Determining when to claim Social Security is often a nuanced decision affected by various aspects.
When making your decision, take into account the following:
- Your personal and family medical history: If you have a history of longevity in your family, you may anticipate a longer lifespan. Czajka suggests, “If you’re in poor health, it might be advisable to start early.”
- Spousal benefits: Married individuals need to think about both their own and their spouse’s benefits. If you claim your benefits early, your survivor benefits may be reduced. In the event of the death of one spouse, the survivor will receive the higher benefit.
- Employment: Working while receiving Social Security payments may affect your benefits. Czajka notes that earning more than $19,560 could lead to a reduction in your benefits. If you haven’t reached full retirement age, earning more than this amount in 2022 may temporarily decrease your benefits by $1 for every $2 earned above it. However, once you reach full retirement age, you can earn an unlimited amount without any temporary reduction in benefits.
- Other sources of income: Alternative income sources, such as 401(k)s or savings, can support you in the early stages of retirement, allowing you to delay your Social Security payments. However, if finances are tight or you lack substantial savings, you may opt to begin payments early.
If you take into account these factors and also do break-even calculations, it will help you in making a better decision about your Social Security claiming strategy.