The choice of when to claim Social Security is more important than you might think. That's because you have the option to start your checks any time after age 62. But the amount of benefits you'll get can vary substantially depending on when you first claim them. Making the wrong choice could leave you with less money each month or less lifetime income, so this is a high-stakes decision.
The good news is, taking one simple step first can empower you with the information you need to make the optimal choice, so you're less likely to be left with regrets. Before you file for benefits, here's what you should do.
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Calculate your break-even age
Before you decide when to start your retirement checks, you should calculate something called your break-even point or age. This is the age at which the benefits you receive from two different claiming scenarios become equal. From that point on, the scenario that offers the larger monthly benefit will offer you greater Social Security income over the course of your life.
Let's say you're trying to decide whether it makes more sense for you to claim Social Security at your full retirement age of 67 versus waiting until age 70 when you qualify for your maximum benefit.
To calculate your break-even point in this situation, here's what you do:
- Figure out what your benefit will be at 67 (scenario 1). You can create an account at my Social Security to estimate your benefits at different ages.
- Calculate how much your benefit will increase if you wait until 70 (scenario 2) -- my Social Security can also help you with this. That said, you can also learn how early filing penalties and delayed retirement credits work and do the calculation yourself.
- Determine how much income you'll miss out on during the three years you don't get payments because you choose to delay your benefits (multiply your monthly benefit in scenario 1 by 36 months).
- Divide the above number by the extra amount you get in your check from scenario 2 over scenario 1. The resulting number is how many months it will take your larger, delayed benefits from scenario 2 to accumulate and become equal to the total benefits received in scenario 1.
For example, if your Social Security benefit at full retirement age will be $1,600, waiting until 70 to claim means delayed retirement credits increase your benefit to $1,984.
You'd give up three years of monthly $1,600 checks ($57,600 total) in exchange for a benefit that's $384 larger. As a result, it would take 150 months (57,600 divided by 384) for the bigger benefit check to make up for the initial years of missed income.
Why is calculating break-even age so important?
When you're choosing between two different claiming ages, you can use your break-even point to figure out if you're better off starting Social Security at the earlier age or the later one.
In the above example, for instance, you'd know you need to live until at least 82.5 years old for the delayed claim to net you a higher lifetime benefit. So if you don't expect to live to at least that age, you're better off starting payments at 67 (or even earlier).
You should consider your personal health history to help you make the right decision, but also keep in mind the other people in your household. If you're the higher earner, for example, you'll want to think about how an early claim would shrink Social Security survivors benefits.
The break-even calculation provides a crucial datapoint to help you determine your optimal claiming age, so be sure to do it before filing for your first Social Security check.
