If you are considering claiming Social Security, there’s a key question that you need to ask before you do. Unfortunately, many people don’t take the time to answer it, and they end up regretting their claim choice.
If you want to ensure you’re making a decision about Social Security that you won’t come to regret later on, make sure you’re not one of those people. Figure out the answer before you start your benefits.
Image source: Getty Images.
Every future retiree needs to ask this Social Security claiming question
The key Social Security question that you must ask yourself is: What is my break-even age? See, this question matters because you get a standard benefit, based on Social Security’s benefits formula, which is determined by your average wage during your 35 highest-earning years. But you only get that standard benefit if you start getting checks at your full retirement age (FRA).
Your FRA is 67 if you were born in 1960 or later, but you can claim benefits starting at 62 or wait as long as 70. You get an increase in your payment for each month you delay. Since your benefit changes based on your age when you claim it, you need to ask yourself what your break-even age is if you delay your benefits.
What is your break-even age, and how do you calculate it?
Your break-even age is the age when you will break even for claiming benefits later. You can calculate it by figuring out how much income you miss out on by delaying, and then determining how many months you would need to collect larger Social Security checks to make up for that missed income.
Say you had a standard benefit at FRA of $2,000 but were deciding between a claim at 62 and a claim at 70. Here’s how you’d calculate your break-even age:
- Figure out your benefit at 62. Your online Social Security account will have this info. In this case, because a claim at 62 is before FRA, and you get hit with early filing penalties that reduce benefits by 30%, your benefit would be $1,400
- Figure out your benefit at 70: With a 24% increase from waiting three years after FRA to claim your benefit, you’d collect a $2,480 monthly check.
- Calculate the missed income. That’s eight years of benefits totaling $1,400 per month, or $134,400.
- Calculate the extra income from the delay. That’s done by subtracting the lower benefit from the higher one, so in this case, you get $1,080 extra ($2,480-$1,400).
- See how many months it takes of extra income to make up for missed benefits. Divide the total income missed by the extra income from delaying ($134,400 divided by $1,080). This shows it will take you 124.4 months to break even.
Once you calculate your break-even age, you can think about whether you’re likely to live long enough to hit it. If you’ll live 10.4 years beyond age 70, you’ll break even. And if you live any longer, you’ll end up better off since you will be able to keep collecting your higher benefit until you die. You’ll get more lifetime income than you would have with an earlier claim.
Of course, you can’t know how long you’ll live. But this calculation can still provide some insight that can help you make an informed choice about whether to claim benefits early or delay. You can consider your family history, health history, and current medical situation to decide what makes the most sense.
So, do not claim your Social Security payments until you have a clear answer to exactly when you’d break even for a delayed claim.
