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 benefits are the most common source of income among retirees. The monthly benefit is a guaranteed amount that you can start receiving as early as age 62. Various factors will affect how much benefit that you get over your lifetime.

Key Takeaways

  • Deciding at 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 breakeven age for benefits is a useful way to ensure that you balance payments versus 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 (FRA) depends on the year when you were born. For example, your FRA is 67 if you were born in 1960 or later. If you elect to take your benefit before it, then 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 your FRA, your total lifetime payment could be lower.

30%

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 your FRA.

When you reach your FRA, 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 their FRA 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 age 70 creates the fewest number of checks received, but it 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 breakeven age.

Your Social Security breakeven age is the point in your life when the total of those lower benefits comes to equal the total of benefits that you would have received if you had waited to take your benefits at FRA or even later.

How to Calculate the Social Security Breakeven Age

For example, if you were born in 1960, your FRA is 67. If you choose to begin receiving Social Security income at age 62, which will be in 2022, then your FRA 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 co-worker with the same birth date and similar earnings history elects to receive their benefit at FRA five years later, then 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 co-worker received nothing, so you are ahead. Once your co-worker starts receiving benefits, however, they get $300 more each month—or $3,600 more each year—than you do. So when will your co-worker catch up to you in total benefits? Let’s plug the numbers for both of you into a Social Security breakeven calculator, which divides the amount by which you are ahead by the higher amount per year that your co-worker receives.

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

The Bottom Line

Of course, the breakeven age will vary based on a person’s FRA 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 that you are likely to live past your breakeven age, then it’s probably better to defer taking Social Security benefits until your FRA 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, AEP, CFS, RICP
Founder and Managing Partner, 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 breakeven 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 breakeven analysis can’t capture these.