Social Security provided $955 billion in benefits to 62 million seniors in 2017, and more than one-third of Americans expect it to provide the bulk of their retirement income. While Social Security is a popular and important entitlement program, it's far more complicated than many people realize.
There are a lot of misconceptions surrounding Social Security, and many of them center on when it's best to claim benefits. Your monthly income from Social Security is permanently affected by the age at which you begin receiving benefits, so you'll want to be strategic about when you get your first Social Security check.
This simple math will help you decide how to maximize your benefits by claiming Social Security at the age that makes the most sense for you.
Image source: Getty Images.
How to decide when to take Social Security
To determine when you should claim Social Security benefits, the first thing you need to know is how much your benefit will be if you claim at different ages. Social Security pays you a certain amount, based on your work history, when you reach full retirement age (FRA).
If you retire before FRA, your benefit is reduced. If you retire after FRA, your benefit amount increases until age 70, at which time there are no further increases. Delaying, then, results in a larger monthly benefit, but you'll be paid that benefit for fewer years.
The key math when deciding the age at which to claim benefits involves calculating your breakeven point. This is the point at which the extra monthly income from the larger benefit equals the benefits you lost by delaying. Once you've reached the breakeven point, you've made up for the years of missed benefits.
Finding your breakeven point to decide when to take Social Security
To find your breakeven point, you need to know how much benefits are increased, or reduced, by claiming early or by waiting to claim benefits.
The amount of increase or deduction is based on your FRA, which is 67 for people born after 1960. If you claim benefits less than 36 months before FRA, benefits are reduced by five-ninths of 1% for each month before FRA. If you claim benefits more than 36 months before FRA, benefits are further reduced by five-twelfths of 1% . If you claim after FRA, benefits are increased by two-thirds of 1% per month until age 70, if you were born after 1943.
This table shows the percent increases or decreased, based on a FRA of 67.
| Age You Claim Benefits | Impact on Benefits Compared With FRA |
|---|---|
| 62 | 30% reduction |
| 63 | 25% reduction |
| 64 | 20% reduction |
| 65 | 13.3% reduction |
| 66 | 6.7% reduction |
| 67 | no change (Full Retirement Age) |
| 68 | 8% increase |
| 69 | 16% increase |
| 70 | 24% increase |
Data source: Social Security Administration.
Once you know your monthly benefit at each age, you can compare how long it would take for a higher monthly Social Security income to make up for years of missed benefits. Here's simple math to find this number:
Lower annual benefit
x Extra years of benefits
/ Difference between higher and lower annual benefit
For example, if your benefits at 67 would have been $18,000 annually, a 30% reduction for claiming at 62 would leave you with $12,600 annually -- $5,400 less per year than you'd receive if you waited. Five extra years of benefits gives you $63,000, so divide this by $5,400 to get your breakeven point of 11 years and eight months.
After receiving a higher benefit for 11 years and eight months, you'd have made up for $63,000 in missed income. Every month thereafter, the extra money is money you'd have missed out on by claiming early. If you expect to live past 78, you'd be better off waiting.
Should you claim Social Security benefits early?
There are lots of factors to consider when deciding whether to claim Social Security benefits, including whether you could claim benefits on your spouse's work record.
Still, by calculating your breakeven point, you're one step closer to making a fully informed choice. It's up to you to decide if you want to claim early to get guaranteed extra income, or wait so you don't face a reduced benefit for the rest of your life.
