Retirement planning involves a long list of important decisions. From where to retire to your retirement savings withdrawal strategy to your desired retirement plans, there's no shortage of decisions. However, one of the more important decisions anyone will make about retirement is when to claim Social Security.
Your full retirement age is when you're eligible to receive your primary insurance amount (PIA), but you aren't required to claim benefits then. You can claim before your full retirement age (starting at 62), reducing monthly benefits, or delay benefits past your full retirement age (until 70), increasing monthly benefits.
The thought of delaying Social Security benefits until 70 may seem appealing because of the increased monthly payouts. But there's one good reason why that might not be the best option, and it all starts with your break-even age.
Image source: The Motley Fool.
Calculating your benefit decrease or increase
Before we discuss break-even age, it's important to understand exactly how Social Security benefits are affected by when you decide to claim them.
Your monthly benefits are reduced by 5/9 of 1% for every month you claim early, up to 36 months. Every additional month after 36 reduces benefits by 5/12 of 1%. If your full retirement age is 67 (which it is for most people) and you claim benefits at 64, they'll be reduced by 20%. If you claim at 62, they'll be reduced by 30%.
Every month you delay benefits past your full retirement age will increase them by 2/3 of 1%, or 8% annually, until you turn 70. After age 70, benefits are no longer increased, so that should realistically be the latest you claim benefits.
Calculating your break-even age to get perspective
Your break-even age is when the total amount of benefits received from claiming at one age equals that of another. Knowing when this age is is useful because it can help you decide whether delaying for increased monthly benefits is worth the wait.
As an example, let's imagine someone who is debating between claiming benefits at 67 (full retirement age) and 70. If their PIA is $2,000, their monthly benefit would be $2,480 if they delayed until 70.
At age 80, someone who claimed benefits at 67 would have received $312,000 total; someone who claimed at 70 would've received $297,600. At age 82.5, someone claiming at 67 or 70 would've both received $372,000 in total benefits, making 82.5 their break-even age.
Consider your life expectancy to help guide your decision
Knowing your break-even age is only half the consideration equation. The other half is life expectancy. Below are Social Security life expectancies at certain ages:
| AGE | Men's Life Expectancy | Women's Life Expectancy |
|---|---|---|
| 62 | 81.03 | 84.04 |
| 67 | 82.58 | 85.10 |
| 70 | 83.59 | 85.82 |
Data source: Social Security Administration.
The data shows how similar a man's life expectancy at 67 and 70 is compared to their break-even age between claiming at 67 and 70. Women have more leeway because their life expectancies are longer than men's at those ages, but it's still close enough to be a serious consideration. You should ask yourself if missing 36 months' worth of payments is worth the delay. For many people, the answer is no.
Whatever the case, though, be sure to consider other factors alongside the break-even age/life expectancy comparison. That alone shouldn't be the deciding factor -- it should be a piece of the puzzle, along with other factors. For example, if you have a personal or family history of health issues, claiming benefits earlier may be the better option. If you can thrive and survive in retirement with Social Security income, delaying may better suit you.
There is no right or wrong answer, just the answer that fits your personal situation best. Most importantly, do what you're comfortable with.
