It's hard to overstate how important Social Security has been and continues to be for so many Americans. Unfortunately, navigating the world of Social Security isn't always the easiest task. There are many rules, exceptions, and regulations, and the landscape changes regularly.
Despite the complexities, there is one chart that can simplify your decision-making process and help you cut through some of the noise.
Image source: The Motley Fool.
This Social Security chart is the most important one you'll see, because of how central your full retirement age (FRA) is to your Social Security retirement benefits. It should be the guide for helping you make an informed decision about when to claim benefits.
How benefits are affected by claiming early
While your FRA is when you can receive your full Social Security benefit, you don't have to wait until then to claim. You can claim as early as age 62, but doing so will reduce your benefits based on how many months away you are from your FRA.
For people who claim benefits within 36 months of their FRA, benefits will be reduced by five-ninths of 1% for each month. Every month after 36 months will reduce benefits by five-twelfths of 1%. Most people's FRA is 67, so claiming benefits at 62 would reduce the monthly payout by 30%.
How benefits are affected by claiming late
Claiming benefits past your FRA has the opposite effect of claiming early, increasing them each month until you reach age 70. The calculation is also more straightforward: A two-thirds of 1% increase each month. This works out to an 8% annual increase, and a 24% overall increase if someone whose FRA is 67 delays until they turn 70.
If you decide to delay benefits, you don't have to claim them when you turn 70. But they won't increase any more after that, so there's no real reason not to claim them at that point.
Using your full retirement age to find your breakeven age
People often see the increased monthly payments from delaying benefits and use that as the sole reason to do so. However, the choice is better made by looking at your breakeven age, which is the age where the total amount from claiming benefits early or at your FRA equals the total amount from delaying them.
As an example, let's assume someone's FRA is 67, and they're considering claiming benefits at 70. If their base benefit at their FRA is $1,800 (close to the average for retirement benefits in August 2023), it'll be increased to $2,232 by delaying until 70. Here are the total amounts received at certain ages:
| Claiming Age | Monthly Benefit | Total Amount Received by 80 | Total Amount Received by 82.5 |
|---|---|---|---|
| 67 | $1,800 | $280,800 | $334,800 |
| 70 | $2,232 | $267,840 | $334,800 |
Source: Author calculations.
It's not until they reach 82 1/2 years old that the amount they would have received from delaying equals the total amount they would've received by claiming at their FRA. With that in mind, the consideration needs to be whether waiting until 82 1/2 years old to "break even" is worth the many months of missed payments between their FRA and 70.
Consider your personal situation before deciding when to claim
Your breakeven point should be a guiding factor when deciding when to claim benefits, but it should only be a piece of the equation. Everybody's personal situation is different, meaning personal goals, financial needs, and risk tolerances will differ.
For example, someone with a sizable retirement nest egg may not rely on Social Security for their livelihood and decide delaying benefits is worth the increase. You also have people whose health situation pushes them to claim benefits as soon as they're eligible. The variations in people's situations are endless.
There's no right or wrong time to claim benefits, just the time that fits your personal situation.
