A lot of advice about when to claim Social Security centers around claiming at either age 62 (the earliest possible age) or age 70 (the latest possible age). However, the full retirement age, or the age at which you receive 100% of your Social Security benefit, is 66 years old for many retirees. Claim before then and your monthly Social Security checks will be 25% smaller, but you'll receive four more years of checks.
Choosing to wait until full retirement age to begin collecting Social Security can be a difficult decision, but if you're considering waiting until then, knowing when that decision will break even with claiming at age 62 could be helpful.
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What are my options?
To qualify for Social Security, you need to accumulate 40 work credits and most Americans reach that number of credits over a 10-year career. If you qualify for Social Security benefits, here are some rules you should know about the program.
Social Security benefits are paid to recipients monthly and the amount that recipients receive in Social Security income is determined by a formula that is based on their highest 35 years of earnings. If you worked fewer than 35 years, the amount of your benefit will be based on however many years you ddid work. If you worked more than 35 years, your highest income-earnings years will replace your lowest income-earning years, thereby boosting the size of your Social Security check.
If you qualify for Social Security, you can claim your benefits at any point between age 62 and age 70. However, claiming before or after your full retirement age will result in a smaller or bigger check, respectively.
While full retirement age is currently age 66, it increases based on the year of your birth to age 67.
Data source: Social Security Administration.
Regardless of when you claim Social Security, the program is designed to pay out the same amount of money to you over your lifetime. Therefore, claiming early results in smaller monthly checks than waiting to do it later. For example, if your full retirement age is age 66 and you claim at age 62, you'll receive 75% of the benefit you would have otherwise received at age 66.
Data source: Social Security Administration.
Your Social Security breakeven point
If your full retirement age is 66 and you wait to claim Social Security until then, the total amount you receive from Social Security will eclipse the amount you would have received by claiming at age 62 when you're 78 years old.
For instance, let's assume Jim will receive $750 per month in Social Security income if he claims at age 62 or $1,000 if he claims Social Security at age 66. If Jim claims Social Security at age 62, he'll have received $45,000 in Social Security payments when he turns 66, $81,000 when he turns 70, and $126,000 when he turns 75. If he waits until 66 to claim, he will receive total payments of $60,000 at age 70 and $120,000 at age 75. It won't be until age 78 that the amount he gets in Social Security income eclipses the amount he would get if he claimed at age 62.
Data source: Author's calculation.
While this example offers a good estimate for when you would break even on your decision on when to claim, your precise breakeven point will vary depending on your exact full retirement age and the age at which you claim your Social Security.
The time value of money
Money that you hold in your portfolio today is worth more than money you'll receive in the future because that money can be invested to generate a return. Breakeven analysis doesn't take that time value of money into consideration, so it's less useful for people who don't need their Social Security income to pay for their day-to-day expenses.
Retirees with retirement income from other sources can choose to invest their Social Security payments, and depending on the return they generate from those investments, their breakeven point could be pushed back beyond their late 70s and into their 80s. For example, if Jim claims at age 62 and invests his $750 per month in Social Security in an investment that returns a hypothetical 6% per year and his friend Joe claims at age 66 and invests his $1,000 per month in that same investment, Joe's nest egg wouldn't eclipse Jim's in size until roughly age 82.
You should also remember that breakeven analysis doesn't consider changes that could be made to Social Security. Because Social Security outlays already outstrip revenue collected from payroll taxes, the Congressional Budget Office estimates that a 29% across-the-board cut in Social Security benefits would be necessary beginning in 2030. That means that it's likely that Washington will have to make some changes to this program that could affect when someone breaks even.
Tying it together
Relying solely on breakeven analysis to decide to wait to claim Social Security at 66 could be a mistake if you're unmarried and you pass away sooner than you think. Survivors' benefits could still make waiting until full retirement age to claim pay off for you, but only if your spouse lives long enough. If you invest your Social Security income, then your breakeven analysis becomes even more guesswork. Therefore, while breakeven analysis can be useful in determining when to claim Social Security, it shouldn't be the only consideration.
