Editor's note: A previous version of this article incorrectly stated the breakeven point for taking benefits starting at age 65 versus starting at age 62.
Retirement. It's something nearly everyone thinks about at some point. And the closer you get to retirement age, the more you'll think about it.
One of the most important things to decide about retirement is when to do it. Considering delaying when you file for Social Security benefits? Here's how long it could take you to break even.
Image source: Getty Images.
When can you retire?
Practically speaking, you can retire at any age assuming you have sufficient money to cover your expenses. However, if you're counting on Social Security to help fund your retirement, there are some restrictions.
For anyone born between 1943 and 1954, the full retirement age (when you can receive full Social Security benefits) is 66. This full retirement age increases gradually for anyone born between 1955 and 1960 until it hits 67. If you were born in 1960 or afterward, your full retirement age is 67.
But you can file for Social Security retirement benefits sooner. The earliest age at which you can file for Social Security benefits is 62. However, the catch is that you'll be penalized and receive lower benefits based on how much earlier than your full retirement age you file for benefits.
You can also opt to retire after your full retirement age. Doing so will increase your Social Security benefits -- at least up to a point. There won't be any added benefits once you reach age 70.
Breakeven points
Let's assume your full retirement age is 67 and that your monthly benefit at that age is $1,000. Let's also assume that you want to file for Social Security benefits at the earliest age possible -- 62.
Your monthly benefit for retiring at age 62 would be reduced by 30% to $700. The following chart shows hypothetical cumulative Social Security benefits that compare the retirement ages of 62, 65, 67, and 70.
Data source: Social Security Administration. Chart created by author.
The break-even point is when your cumulative benefits received from retiring at a later age equals the cumulative benefits received from retiring at an earlier age. As the chart above shows, it would take quite a while for the additional money you'd receive monthly for delaying Social Security benefits to bring your total up to what you'd get by retiring early, at age 62.
Waiting until age 65 to file for benefits in this scenario would result in breaking even when you're a little over 77 1/2. Waiting until your full retirement age of 67 would mean that you'd break even when you're a little over 78 1/2. Pushing back to collect benefits at age 70 would result in a breakeven point at a little under age 80 1/2.
What if your full retirement age is 67 and you're debating whether to start taking benefits at 67 vs. 70? The breakeven point for you would be at age 82 1/2.
Data source: Social Security Administration. Chart created by author.
Those breakeven points might seem daunting. Keep in mind, though, that the longer you live, the more delaying Social Security benefits will pay off.
A lot to consider
There's a lot to consider in deciding when to file for Social Security benefits. You'll obviously want to factor in your health and family longevity history. Your other sources of retirement income and personal retirement goals are also important to think about.
Some individuals might have enough additional income that they can retire without needing Social Security benefits. Your breakeven point could be lower if you filed for benefits and invested the money. Of course, it's also possible that your investments perform poorly and increase your breakeven point.
If you're married, don't forget to consider your spouse's Social Security benefits. Your spouse's benefits could be reduced by you filing early.
Your situation will probably be different than your friends and extended family. It's important to make the right Social Security decision for you.
