As retirement nears, you may be wondering when to start taking Social Security payments. These benefits are primarily based on your earnings during your working years and your age when you start receiving benefits. You can start payments at age 62, but your checks will be reduced. If you wait, your monthly checks will increase until age 70. Your break-even age is the point when drawing your payments later begins to exceed the value of starting payments early.
As you think about your break-even age and Social Security, it can be helpful to go over the following:
— Understanding Social Security benefits.
— Step-by-step guide to calculating your Social Security break-even age.
— The impact of delaying Social Security benefits.
— Utilizing Social Security calculators.
— How to decide on the right time to claim Social Security benefits.
[READ: How Much You Will Get From Social Security.]
Understanding Social Security Benefits
If you’ve worked and paid taxes, you could be eligible to receive Social Security benefits. The program was designed to help support retirees, and if you qualify, you’ll be able to receive a check every month. You’ll need to fulfill requirements such as having worked and paid Social Security taxes for 10 years or more. Or you could get a benefit based on a current or former spouse’s work record.
The amount you receive each month will be based on your earnings during your working years. The number of years you worked will also play a role. The Social Security Administration uses a formula that takes into account the average of your highest earning years, up to 35 years.
“If you start claiming benefits at age 62, you’ll receive 70% of your full benefit amount, spread over a longer period,” Dayna Smith, partner and financial advisor at Cedar Brook Group in Cleveland, said in an email. If you wait until your full retirement age, you’ll get the full benefit. For every year after your full retirement age that you wait to receive benefits, the amount will increase by 8% up to age 70.
Step-by-Step Guide to Calculating Your Social Security Break-Even Age
You can find your break-even age by doing some calculations based on your age and benefit. If you are full retirement age and decide to wait to claim Social Security benefits, find out what the 8% increase would be for each year you delay. Then determine the amount of benefits that you don’t get by waiting. Divide the sum of forfeited benefits by the increase. This will give you the number of months that it will take to break even.
For instance, perhaps your full retirement age is 67, at which time you qualify for $2,000 a month. You decide to wait until age 68 to apply for benefits. This will increase your benefit by 8%, which comes to $160 more ($2,000 x 0.08). Your monthly paycheck will be $2,160. The money you won’t receive by waiting is $24,000 ($2,000 x 12 months). To find your break-even age, you can divide $24,000, which is the amount you did not receive at age 67, by what you gain each month, $160. This comes to 150 (24,000/160). You’ll need to wait 150 months to break even, which is the equivalent of 12 years and six months. Your break-even age is 80 years and six months if you wait until age 68.
If you are not full retirement age and want to take benefits early, determine the amount of benefits you would have received by your full retirement age. Then calculate the loss each month in benefit resulting from applying early. Divide the total amount you would have received by your full retirement age by the amount given up each month by taking benefits early. This will give you the number of months it will take to break even.
Say your full retirement age is 67, and you decide to take benefits at age 62. Your benefit at full retirement age is $2,000, and it will be reduced by 30% each month. You will receive $600 less each month (2,000 x 0.30), which means each paycheck will be $1,400 ($2,000 – $600). Then take $1,400 and multiply it by 60 months, which is the amount of time it will take you to reach your full retirement age of 67. This comes to $84,000. Next divide that amount by what you gave up each month ($84,000/600), and you’ll get 140. It will take 140 months for you to reach break-even age. This comes to 11 years and eight months. If you start taking benefits at age 62, you’ll be 73 years old and eight months when you break even.
The Impact of Delaying Social Security Benefits
If you start Social Security payments early, you receive less per month but you get the benefit of receiving payments immediately. Collecting Social Security later will result in a larger monthly benefit, but it will take some time to receive as much total income as you get by starting early. “The easiest way to think of the break-even age is to think of it as the age at which you come out ahead for waiting to start Social Security benefits,” Taylor Jessee, a financial planner at Impact Financial in Richmond, Virginia, said in an email.
If you draw benefits early, the checks you receive will be less but you will get the payments over a longer period of time. By waiting, you’ll get a higher amount for a shorter period of time. The strategy that produces a higher lifetime benefit ultimately depends on how long you live.
Utilizing Social Security Calculators
While you can find your break-even age on your own, it may be helpful to use an online Social Security calculator. These may account for inflation and other factors that could impact your benefit. You can estimate your benefit, look at different scenarios that result from delaying benefits and evaluate how working could affect what you receive. AARP has a Social Security calculator, and so does the Social Security Administration.
[Related:Average Social Security Benefit by Age]
How to Determine the Right Time to Claim Social Security Benefits
While break-even calculations can be helpful, there are other factors to consider. “If everyone knew how long they’d live, timing Social Security would be a piece of cake,” Jessee said. But a Social Security claiming decision is often more nuanced.
When deciding when to claim Social Security, consider:
Your Personal and Family Medical History
If longevity runs in your family, you might expect to live longer. On the other hand, “if you’re unhealthy, you might want to take it early,” Chuck Czajka, a certified financial fiduciary at Macro Money Concepts in Stuart, Florida, said in an email.
Your Spouse’s Benefits
If you’re married, you’ll want to think about the benefits you and your spouse will receive. “If you take it early, your survivor benefits will be reduced to your spouse,” Czajka said. “When a spouse passes, the survivor will get the higher of the two benefits.”
Your Desire to Work
Working while receiving Social Security payments could have an impact on your benefit. If you take benefits before your full retirement age and then earn more than the limit established by the IRS, the amount of your benefit could be reduced. When you reach your full retirement age, you can earn an unlimited amount without having your benefit temporarily reduced.
Other Income Streams
You might have a 401(k) or other accounts that will support you at the beginning of retirement and allow you to wait until later to begin claiming Social Security. If funds are tight or you don’t have other savings, you might opt to begin payments early.
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How to Calculate Your Social Security Break-Even Age originally appeared on usnews.com
Update 11/22/23: This story was published at an earlier date and has been updated with new information.
