There’s an old axiom that says nothing in life is certain except death and taxes. True enough. But there’s one other thing that’s certain; we’re all going to retire—sometime. The number one retirement question I’m asked is, “What is the perfect age to retire?” Close on its heels is, “When should I start taking Social Security?”
The Social Security question is certainly a valid one. Social Security plays a big part in retirement income for many Americans. And there’s a fairly wide window of when you can begin taking your Social Security benefit. Age 62, Full Retirement Age, and Age 70 are the three most often discussed options.
Age 62 is the earliest you can choose to receive your benefit. If you begin taking Social Security anytime from 62 until your full retirement age you will receive a permanently reduced benefit.
Full Retirement Age (FRA) for most these days is 66-67 depending on when you were born. Your FRA is when you receive 100% of what the Social Security Administration says you are due based on your work history, which is defined as the 35 highest earning years of your career.
For every year you do not receive Social Security, between Full Retirement Age and age 70, you receive delayed credits which increases the amount you receive by 8% per year. When you reach age 70, the delayed credits stop, so it doesn’t make sense to delay receiving Social Security past age 70.
How do you choose a Social Security start date that make the most financial sense for you? You calculate your break-even age.
Let’s say you’ve reached your Full Retirement Age and if you begin your benefit now your monthly benefit will be $1,000/month. But you like what you do and you might work another year before beginning Social Security. Because of the delayed credit, your monthly benefit will be $1,080 next year. What’s your break-even age?
In this calculation, if you wait to begin receiving Social Security in one year, you give up $12,000 this year ($1,000 x 12 months). Next year you will receive an additional $960 because you waited ($80 x 12 months = $960). Divide the $12,000 you would not receive this year by the extra $960 you get by waiting one year ($12,000 / $960 = 12 ½ years.) You would have to live another 12 ½ years to break even on your decision to postpone receiving Social Security for a year.
The calculation is the same if you begin Social Security before Full Retirement Age (FRA). How much would you give up this year. Divide that by the additional monthly amount you would receive next year, and you’ll know how many years it will take before the decision to wait makes financial sense.
But let’s put some numbers to it. Our friends at SmartAsset did calculations based on starting Social Security at different ages:
- Receiving $1200/month at age 62
- Receiving $1700/month at 66
- Receiving $2200/month at age 70
The break-even point represents when the cumulative benefits even out. So, if you wait until age 70 to start taking benefits, it would take you until age 79 to break even with the benefit amount you’d receive if you started taking them at age 62. If you were to start receiving benefits at age 66, it would take you until age 75 to break even with the benefits you’d receive if you started them at 62.
Now let’s track the dollars over 10, 20 and 30 year periods.
Your cumulative benefits after 10 years:
- $144,000, starting at age 62
- $122,400, starting at age 66
- $52,800, starting at age 70
Your cumulative benefits after 20 years:
- $288,000, starting at age 62
- $326,400, starting at age 66
- $316,800, starting at age 70
Your cumulative benefits after 30 years:
- $432,000, starting at age 62
- $530,400, starting at age 66
- $580,800, starting at age 70
But Social Security break-even calculations are hypothetical. They don’t factor in a whole list of things that could affect your ability to draw Social Security benefits or things that may affect your timing to begin benefits.
- Is your health good or not so good?
- Do you need to keep working to have health insurance?
- What’s your family history of longevity? How long did your ancestors live?
- How much money do you owe?
- How much retirement income do you need?
- What will be your sources of retirement income and will they cover what you need?
- Do you plan to work part-time or full-time after you retire?
- If you retire before Full Retirement Age, are you aware of the penalties and the permanently reduced Social Security benefit you’ll receive.
- If you retire before Full Retirement Age, are you aware of the penalties if you earn too much money?
- Future Social Security cost of living adjustments
- How much tax you’ll owe on Social Security benefits
- Inflation
You can find lots of valuable information about your work history and your Social Security account at www.ssa.gov. You’ll need to set up a My Social Security account. That’s where you’ll see SSA estimates of how much your benefit will be at 62, Full Retirement Age, and age 70. There’s also a record of your income for every year since you first started paying into the Social Security system.
There’s no one right answer about when to begin Social Security. Make sure your decision is based on your research and your situation.
This article is presented as information only and should not be considered financial, tax or legal advice.
