How do I calculate my Social Security break-even age?
Individuals nearing retirement can implement a number of strategies to cover living expenses during their post-working years. Although retirement plan distributions and pension payments are common, Social Security income is the most widely used income plan among retirees. The monthly benefit is a guaranteed amount a person can start receiving as early as age 62. Despite Social Security being a commonly used method in retirement income planning, various factors affect how much benefit an individual receives over his or her lifetime.
When to Take Social Security Income
Retirees can elect to receive Social Security benefits starting at age 62 or as late as age 70, although full retirement age varies depending on which year one was born. If an individual elects to take an early benefit, prior to their full retirement age, income is reduced by as much as 30%. Although the total amount of income checks received is higher than for those who wait until full retirement age, the total lifetime payment may be lower.
At full retirement age, an individual receives a full benefit based on the amount of Social Security tax paid into the system through his or her lifetime, up to a maximum monthly benefit amount. Although fewer total checks are received, total lifetime payout may be higher. Individuals who are able to defer taking Social Security income until after full retirement age are given a delayed retirement credit each year past that age until age 70, equivalent to an 8% increase. This creates the fewest number of checks received but results in a much higher monthly benefit. To determine the most appropriate age for a retiree to begin receiving income, calculating Social Security break-even age is beneficial.
Calculating Social Security Break-Even Age
When benefits are elected, a retiree makes a permanent choice, meaning benefits are reduced over the course of a lifetime, not just until full retirement age. As such, it may prove helpful to calculate the Social Security break-even age in an effort to determine when total benefits received equal the same amount under different age elections.
For example, if we assume the full retirement age for a retiree is 65 and he or she chooses to begin receiving Social Security income at age 62, his or her full retirement age benefit of $1,000 is reduced by 20%, leaving the retiree with $800 each month. If the retiree's co-worker with the same birth date and similar earnings history elects to receive his or her benefit at full retirement age three years later, the benefit equals $1,000 each month. For the first three years, the first retiree received $28,800 while the second received nothing. Once the second retiree starts receiving benefits, he or she receives $200 more each month, or $2,400 more each year than the first retiree. The Social Security break-even age is 77, or 15 years after the first retiree elected to receive benefits. After this point, the second retiree earns more over his or her lifetime than the first.
Although mortality is an unknown, retirees who think they may live past the break-even age may want to defer taking Social Security benefits until full retirement age, while those who do not expect longevity may want to start benefits early.
The way social security benefits calculated is based on your presumed life expectancy. The myth or confusion is if one claims later, one gets a bigger pay, which can be true if one lives beyond the “presumed” age. In other words, whether you claim early or late, it’s the same amount of money if you indeed live to the prescribed life expectancy according to the social security administration actuary’s chart.
Finding the break-even age is not the best way to decide when to claim the benefits as it depends on various factors, your family health history thus the longevity, your marital status thus the spousal or survivor benefits, your working history thus your later years earning, etc. But, if you’re still curious, set up your user name and log into the social security administration’s website, “My account”, to check it out as it provides that information.
Given aforementioned variables and you want to learn what may be the best age for you to claim, please seek a professional’s help, who may use special social security software to try different scenarios to figure it out the best way to suit your unique situation. Best!
Hi! Thank you for writing. This is such a tough question! The Investopedia answer given is exactly right, but the big question of how long you will live is one we don’t usually know the answer to. Here are some of my thoughts from a book I worked on: “Although you can start your Social Security benefits as early as age 62 (or even age 60 as a widow or widower), the monthly amount will be much smaller than if you are in the financial position to be able to wait. However, waiting is not always the right choice either. Each option should be evaluated, taking into account your own personal circumstances.
Here’s an example – Retiree A is 62, with a full retirement age (FRA) of 66. If he starts taking benefits at 62, he gets $1,200 a month. If he waits until age 66, he receives 33% more, or $1,600 a month. He decides to wait until age 70 to take benefits, so his payments increase another 32%, to $2,112 a month for the rest of his life. He ends up living to age 89, and his lifetime benefits are about $38,000, or 13% higher, because he waited until age 70 to collect benefits. Plus, as he gets older, he has the comfort of knowing that $2,112 is coming in each month, which is much better than the $1,200 he would be getting had he started at age 62. Of course, this choice is not without drawbacks. Even though he is paid more money in total by having waited, Retiree A technically could have been investing the $1,200 that came in each month over the 8 years between when he was 62 and 70, which could possibly have earned him more money. On the other hand, take Retiree B, who also decides to delay taking benefits at age 62 and to gamble that he will also live long enough to collect the higher amount. Unfortunately, Retiree B doesn’t live until age 89. When he dies 2 years later at age 64, he hasn’t collected any money from Social Security. He paid into the Social Security system for his entire 40-year career but dies before he gets a penny of benefits. It can be frustrating when that scenario occurs. Although Retiree B is no longer with us to say “I should have started those benefits at 62,” you can bet he’d be complaining if he were alive and able to!
So when is the best time to start taking Social Security benefits? Unfortunately, there’s no “one-size-fits-all” answer. If you need the money to pay your monthly expenses, then of course you will start your benefits as soon as you can get them. If you don’t need the money right away, the decision is harder. Take them too early and you’ll kick yourself on your 100th birthday. Take them too late and you lose out on money that is rightfully yours. According to data compiled by the Social Security Administration, a man reaching age 65 today (2016) can expect to live, on average, until age 84.3; a woman turning age 65 today can expect to live, on average, until age 86.6. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95. Making this decision is a bit of a gamble. If you have great health and come from a family blessed with longevity, you will probably want to delay benefits if you don’t need the money. If your health isn’t great and few of your family members lived to a very old age, you may want to start at age 62 to make sure you see at least part of the money due to you from a lifetime of contributing to the Social Security system.”
I wish I could give you a definitive answer!! Best wishes to you and please write back if you have more questions.
It's important to note, that for married couples, determining a break-even age for Social Security benefits can be quite a bit more complicated than for a single person. This is because a surviving spouse has the option of either continuing to receive the Social Security benefit he or she had been receiving, or to take the deceased spouse's higher benefit. Once the additional person comes into the equation, the potential longevity of both need to be taken into account. The Social Security analytic tools that are available to help determine optimal claiming strategies often note that in the case of a married couple, thousands of potential collection strategies have been looked at to determine the one that maximizes lifetime benefits. This is the case when only one lifespan is selected for each spouse. Once we start testing multiple longevities, the number of possibilities and optimal claiming strategies can increase significantly.
The paragraph above is basically trying to point out that the Social Security break-even calculation can be quit a bit more challenging than working out a few formulas, once you add a spouse into the equation. The higher of the 2 benefits being received by the couple, will be available until the end of the lifetime of the last spouse to survive, therefore making it a consideration worth factoring into the calculations.
In answering this question it is probably best to start with a refresher on certain key concepts relating to Social Security. Full retirement age (FRA) is age 66 for people born between 1943 and 1954, and gradually rises to age 67 for people born in 1960 or later. The primary insurance amount (PIA) is the dollar amount a worker receives if he or she waits until full retirement age to start collecting Social Security. The PIA is different for each worker depending on various factors and yours can be found on the social security website or should be receiving a document mailed every year with your current numbers.
A worker may start retirement benefits as early as age 62, or choose a month of entitlement (MOE) to benefits in any month up to age 70. A worker gets extra credit—called delayed retirement credits—by waiting to take Social Security after FRA. Someone can wait to start receiving benefits as late as age 70 when the benefit amount is the highest. There is no advantage to waiting beyond age 70 because benefits do not increase any further. For someone born in 1943 or later, the amount of the delayed retirement credit is 8 percent of the PIA for each year beyond full retirement age until age 70, for a maximum credit of 32 percent.
By definition, the break-even is the age when total Social Security income from two retirement options is the same.
It is one of various ways to examine when to take social security. There are many basic calculators that can be found online that are a good starting point for quantitative measures.
Social Security benefits are designed to be actuarially equivalent for someone with average mortality. Theoretically, it should not make a difference when an individual starts collecting benefits. However, external (quantitative) factors may affect the actual amount of benefits received. These factors include inflation as measured by annual cost-of-living increases, the time value of money of taking benefits early and investing that amount, and taxes and can vary grossly depending on the numeric values used by the calculator used. These variables include the assumed rate of inflation, the return on investment, and marginal tax rates
Many qualitative factors affect the decision of when to file for Social Security benefits, including health, personal financial considerations, and employment status and cannot simply be captured by a break even analysis. If clients can be flexible in their decision, a financial professional should help them assess the financial advantage of the options available.
This is not tax or legal advice. For more information regarding your benefits, please log in to ssa.gov,
PPG 117995 (8/16)(Exp 8/18)
The question of when to take your Social Security benefits is a very important one. While the calculation of the break even age can be completed using several online calculators, including the Social Security website itself, this is but one factor to review when making a decision as to when to initiate benefits. You can create an account on the Social Security website and get an estimate of your benefit by clicking on this link: https://www.ssa.gov/retire/estimator.html?gclid=CPzzmN3npc4CFUMkgQodf5UCnQ. There is a calculator you can use to determine your break even age using the data you retrieve when you create your own Social Security account and there are also “what if” options you can review.
Prevailing thinking today is that it makes a great deal of sense to delay beginning Social Security benefits, with the idea of increasing the longevity protection you may receive from them at higher benefit levels. With today’s longer life expectancies, Social Security that is maximized can help people continue to manage expenses at retirement. Too often in the past benefits were initiated early such as at age 62, with the result that the monthly benefit was permanently reduced by 25%. This is a lifetime income reduction that amounts to thousands of dollars over time. If you can delay even beyond full retirement age then you can earn delayed credits of 8% per year. Delayed credits greatly enhance the lifetime value of this stable income for you or for a surviving spouse. Consider factors such as family history, current health status and the fact that people are living much longer today. Also consider spousal and survivor benefits and how these might be affected. Do you need the income now or can you wait? These are all questions to consider as thoughtfully as possible and with accurate data.
Charlotte Dougherty is a registered representative of Lincoln Financial Advisors a broker/dealer (Member SIPC) and a registered investment advisor. CRN-1562456-080316