Everyone wants higher income in retirement, right? You can get it by waiting to collect your Social Security benefits until you're 70. Even so, waiting until the last minute to collect your retirement benefit may not be the right strategy.
There are good reasons to collect your Social Security long before age 70. The best of those reasons is this: When you claim earlier, there are fewer wild cards that can affect the total value of your retirement benefit.
Claim later for a higher benefit
For context, here's a quick review of how timing affects your Social Security income. If you claim Social Security at your full retirement age (FRA), you receive your full benefit as calculated from your income history. Claim earlier than FRA, and your benefit is reduced, but if you claim later than FRA, your benefit goes up.
In theory, your cumulative benefit should be the same no matter when you claim. Either you receive a longer stream of smaller payments or a shorter stream of bigger payments. But the totals of either stream should be the same.
Unfortunately, this theory can fail in real life if your life span is different from the norm. If you die early, for example, you can earn a lot less for claiming later. Likewise, if you die late, you could earn less for claiming early.
Social Security break-even age
Knowing that your cumulative benefit could change based on your timing, a break-even analysis can help you decide when to collect, telling you how long it takes to recoup the cost of waiting for a higher benefit.
You can claim benefits as early as age 62. So to hold out for your highest benefit at age 70, you'd have to forgo eight years of income up front. If your benefit at age 62 is $1,200 monthly, eight years of income adds up to $115,200.
Say that benefit increases by $750 monthly if you claimed at 70 instead of 62. Your break-even age is when the extra $750 pays you back the forgone income of $115,200. In this scenario, that will take nearly 13 years. That means if you pass away before age 83, claiming late works against you.
Here are two wild cards to keep in mind.
Wild card 1: Your life span
Your break-even analysis has the most meaning when you're confident about your estimated life span -- which most of us aren't. If you don't know whether you'll live to see 80 or 90, a break-even age of 83 isn't terribly meaningful.
Worse, you could feel confident about celebrating your 90th birthday, only to face serious health issues in your 70s. A terminal diagnosis is devastating on its own -- and knowing you won't reach your break-even age doesn't help any.
Wild card 2: The future of Social Security
The future of Social Security could look very different than it does today. The federal retirement program is facing a funding shortfall that could affect benefits as early as 2033. Presumably, lawmakers will step in and enact changes to avoid slashing retiree benefits -- but how that plays out is unknown.
The possibility that Social Security benefits could be reduced in 10 or 12 years creates an argument for claiming earlier. You might as well collect what you can now, after all.
Certainty has value
Taking Social Security well before age 70 is the surer bet financially versus holding out for the highest benefit. Unless you're the gambling type or you'd rather keep working until 70, the surer bet should be appealing. After all, certainty has value -- in life and in finance.
As you think about when to file for Social Security, check your break-even age first. Then, look past the numbers and consider the emotional value of certainty. You may decide that having lower income sooner feels better than waiting for more later.