As you enter into your later years, you must make an important choice about when to claim Social Security benefits. You have the option to start checks as early as age 62, as late as age 70, or at any time in between. But, before you make that decision, there's a simple calculation you absolutely must do to make sure your choice is the right one.

Here's what it is. 

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This is one move you absolutely have to make

If you want to make sure you're maximizing lifetime Social Security earnings, you must calculate your "break-even" point before you start your first check. What is your break-even point? It's the point at which a delayed claim for benefits will end up not costing you money, or even paying off for you. 

See, you have the option to claim your first Social Security payment at any time once you turn 62. But every month you wait past 62 will increase the amount of your monthly benefit until you reach the age of 70. It may make sense for you to wait to claim in order to get higher future benefits -- but, of course, the downside is that each month of delay is a check you've given up.

Delaying pays off for you only if you get so many higher checks in the future that you break even for the income you missed by giving up checks -- and then continue to get more payments after that point. Your "break-even" point is the point at which you have received enough higher checks to cover all foregone income. Every extra payment from there on out is a bonus that adds more to your lifetime income than you'd have otherwise had. 

Here's how to calculate your break-even point

Calculating your break-even point is pretty simple. You will need to do the following:

  • Figure out what your Social Security benefit would be at age 62.
  • Figure out how much higher it will be at a later age when you're considering claiming your benefit.
  • Calculate the income lost between 62 and the later age you'd get your first check.
  • Divide the amount of lost income by the extra monthly money you'd receive in each check due to delaying your claim.

You can figure out what your Social Security benefit will be at different ages by signing into your mySocialSecurity account. You can also do this calculation manually by determining your standard benefit and applying early filing penalties or delayed retirement credits to it.

Your standard benefit is the amount you'd get if you claimed at exactly full retirement age. Early filing penalties reduce it by 5/9 of 1% per month for the first 36 months and by 5/12 of 1% for any month you get a check prior to that. Delayed retirement credits increase it by 2/3 of 1% per month of delay until you reach 70. 

If your standard benefit is $1,500 and your full retirement age is 67, here's what this calculation would look like:

  • Your Social Security benefit at 62 would equal your $1,500 benefit reduced by 30% to account for early filing penalties. It would equal $1,050.
  • if you're considering claiming at either 62 or 67, then your benefit at the later age (67) would simply be your standard benefit of $1,500. So, you'd get an extra $450 per month if you put off your claim.
  • The income lost between age 67 and 62 would equal five years of benefits equal to $1,050 per month, so you would end up passing up $63,000 if you didn't claim benefits between 62 and 67. 
  • When you divide $63,000 (your foregone benefits) by the extra $450 that comes from delay, you'd discover it would take you 140 months or 11.67 years to break even.

After you've calculated your break-even point, you can make a more informed guess whether you're likely to live long enough to hit it based on your personal and family health history. If you think you'll die before you break even, a delayed Social Security benefits claim may not be the best choice for you.