Social Security is a significant source of retirement income for most retirees and choosing whether to claim it early or late can have long-lasting repercussions. Claim Social Security prior to reaching your full retirement age and you'll only collect 75% or less of your full Social Security benefit. Wait to claim Social Security until age 70 and you can receive up to 132% of the amount you'd receive at full retirement age, but you'll miss out on years of Social Security checks.
For many people, waiting and taking advantage of the guaranteed increase in Social Security income is attractive. However, before deciding to wait to receive your Social Security, you might want to consider your breakeven point, especially if you don't plan on relying on Social Security payments to cover your monthly expenses. Doing so might have you thinking twice about whether delaying is the right choice for you.
Explaining your Social Security options
Social Security can be taken at any point between ages 62 and 70, but you'll only receive 100% of your Social Security benefit at your full retirement age and that age varies between ages 65 and 67, depending on the year in which you were born.
The amount you receive in Social Security income is calculated based on your highest 35 income earning years, and because the program is designed to pay out the same amount in lifetime benefits regardless of when you claim, monthly payments will be smaller if Social Security is taken sooner and bigger if Social Security is taken later.
The precise amount by which Social Security is reduced or increased will vary depending on the exact month you claim your benefits and your full retirement age, but generally speaking, a person with a full retirement age of 66 would get 75% of their full retirement age benefit if they claimed at age 62 and 132% of their benefit if they waited to claim until age 70.
Running the numbers
Assuming a full retirement age of 66, a person who will get $1,000 per month at full retirement age would receive $750 per month if they claim at age 62 and $1,320 if they wait until age 70.
On the surface, the larger $1,320 monthly payment may appear to be worth the wait. After all, it represents an 8% annual increase for every year beyond full retirement age that you've delayed benefits, and that matches up nicely to the stock market's historical average annual return.
However, basing your decision solely on the size of the check may not be best because you have to remember that if you wait until you're 70 to claim, you'll miss out on years' worth of monthly payments and those payments add up.
For example, if you claim at age 62 and receive $750 per month, you would end up pocketing a total of $81,000 in Social Security benefits at age 70, $126,000 in benefits at age 75, and $171,000 in benefits at age 80. For comparison, collecting $1,320 per month from age 70 on would result in pocketing $95,040 in benefits at age 75 and $174,240 in benefits at age 80. That means that if you delay claiming Social Security until you're 70, you won't break even until you're in your eighth decade.
Breakeven could be even later
On average, Americans are expected to live into their mid-80s and that might have you thinking that waiting and breaking even at 80 will wind up leaving you ahead of the game, but there's a big problem with that line of thinking. The breakeven calculation above doesn't take into consideration the time value of money, or the ability to invest some or all of your Social Security and earn a return on it.
While many Americans count on Social Security income to live on, tens of millions of Americans have other sources of retirement income, such as a pension, that allows them to rely less on Social Security. If that's the case for you, then you might not live long enough to break even if you wait to claim.
For example, claiming at age 62 and investing $750 per month in something that returns a hypothetical 6% per year results in a portfolio worth $422,966 at age 85 and $616,758 at age 90. Waiting until age 70 to claim Social Security and then investing $1,320 per month in that same investment results in a nest egg worth $368,693 at age 85 and $582,686 at age 90.
Take your time
Deciding when to claim Social Security is an incredibly personal decision that depends a lot on your own situation. However, if you're on the fence about when to claim Social Security and you don't need Social Security to live on, then claiming early and investing your Social Security income may be a better option than waiting, especially if health is a concern. If you plan to use your Social Security to finance your retirement, then you'll probably break even at around age 80 if you wait to claim. However, your health at age 80 may not be as good as your health at 70, and that should factor into your decision on when to claim as well. In any case, there are a lot of strategies to consider as to when to claim Social Security, so make sure to do your homework before making a final decision.