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, income from Social Security is the most widely used income plan among retirees. The monthly benefit is a guaranteed amount a you can start receiving as early as age 62. Various factors will affect how much benefit you get over your lifetime.

Key Takeaways

  • Deciding what age to start taking Social Security income can be a complicated question.
  • Start too early and you’ll be taking in smaller checks each month, possibly leaving money on the table.
  • Start too late and you’ll get larger payments, but they will come over a shorter amount of time.
  • Calculating the ideal break-even age for benefits is a useful way to ensure that you balance payments vs. longevity.

When to Take Social Security Income

You can elect to receive Social Security benefits starting at age 62 or as late as age 70, though your full retirement age depends on the year in which you were born. 

Your full retirement age is 67 if you were born in 1960 or later. If you elect to take your benefit prior to it, your Social Security income will be reduced by as much as 30%. Although the total number of income checks received will be higher than if you had waited until full retirement age, your total lifetime payment could be lower.

At full retirement age, you receive a full benefit based on the amount of Social Security tax paid into the system through your lifetime, up to a maximum monthly benefit amount. Although fewer total checks are received, your total lifetime payout may be higher.

Those 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 annual 8% increase for people born in 1943 or later. Waiting until 70 creates the fewest number of checks received, but results in a much higher monthly benefit. To determine the most appropriate age for you to start taking benefits, you need to calculate your Social Security break-even age.

30%

The amount by which your full Social Security benefit will be reduced if you are born in 1960 or later and elect to take benefits at age 62

What Does ‘Social Security Break-Even Age’ Mean?

When you elect to take benefits early, you make a permanent choice—meaning that your benefits are reduced over the course of your lifetime, not just until full retirement age. Your Social Security break-even age is the point in your life when the total of those lower benefits comes to equal the total of benefits you would have received if you had waited to take your benefits at full retirement age or even later.

How to Calculate the Social Security Break-Even Age

For example, if you were born in 1960, your full retirement age is 67. If you choose to begin receiving Social Security income at age 62, which will be in 2022, your full retirement age benefit will be reduced by 30%, Assuming that full monthly benefit would be $1,000, you will be left with a monthly Social Security check of only $700.

If a coworker with the same birth date and similar earnings history elects to receive their benefit at full retirement age five years later, their benefit will be $1,000 each month. For the first five years, you received a total of $42,000 (or $8,400 per year), while your coworker received nothing, so you are ahead. Once your coworker starts receiving benefits, however, they get $300 more each month, or $3,600 more each year than you do. So when will your coworker catch up to you in total benefits? That’s the Social Security break-even age for both of you.

The answer is when you are both 78 years and eight months, or 11.67 years ($42,000 ÷ $3,600) after your full retirement age. After this point your coworker will earn more over their lifetime than you will.

Of course, the break-even age will vary based on a person’s full retirement age and how much their benefits are reduced by how early they choose to take their benefits. In addition, there are other factors that affect when you take retirement over which you may have no control, such as extended unemployment or needing to care for an ill spouse or child. Still, if you think you are likely to live past your break-even age, it’s probably better to defer taking Social Security benefits until your full retirement age or longer. If you are not sure, however, that you are likely to make it that far, then starting benefits early makes more sense.

Advisor Insight

Thomas Mingone, CHFC, CLU, AIF, AEP, CFS
Capital Management Group of New York, Pearl River, N.Y.

Social Security payouts are designed to be actuarially equivalent for someone with average mortality, so, theoretically, it should not make a difference when an individual starts collecting. Still, the break-even age—the age when total Social Security income from two retirement options is the same—can be good to know, as external factors may affect the actual worth of benefits received.

These include inflation as measured by annual cost-of-living increases, the time value of money, probable investment returns, and marginal tax rates. Online calculators can offer a good starting point for estimating these variables. However, remember that personal factors also affect the decision of when to file—health, familial needs, employment status—and a break-even analysis can’t capture these.