How Age Affects Benefits
You become eligible to collect your full retirement benefit 100 percent of the amount youre entitled to receive based on your lifetime earnings history at full retirement age , which is 66 and 4 months for those born in 1956 and will gradually rise to 67 for those born in 1960 and later.
The minimum age to begin benefits is 62, but Social Security reduces your monthly payment by a fraction of a percent for each month before the FRA that you claim. Someone born in 1960 who starts benefits in 2022 will get as little as 70 percent of their full monthly benefit. That reduction is permanent.
If you put off claiming benefits until after full retirement age, Social Security bumps up your prospective payment for each month of delay. That 1960 baby would get 124 percent of their full retirement benefit, for life, by waiting until their 70th birthday to start Social Security.
Why do benefits increase if you wait past 62? Because Social Security works by the principle that over the course of a retirement, you should receive the same total amount regardless of the age at which you start benefits. Monthly payment levels are calculated so that if you file for reduced benefits at 62, you will receive the same total amount as if you start at 70, or at any age in between, if you live to an average life expectancy.
Of course, the average is just that an average and most people live either shorter or longer lives. That’s where the break-even point comes in.
Where To Access A Free Break Even Calculator For Social Security That Solves These Problems
After several years of personal disdain for break even calculators, Ive moderated my thoughts. As long as an individual understands the limitations of a break even analysis that weve discussed above, I do believe there is a benefit in using a break even calculator as a part of your overall decision.
For that reason, weve recently had a one-of-a-kind break even calculator for Social Security built for our community. There is no charge for you to use this calculator and simply requires you to set up a free account.
This break even calculator for Social Security addresses the limitations that most other break even calculators available today pose. With our free tool, you can compare various filing ages down to the month. Weve also built in the COLA adjustments to make sure this calculator is as close to real life as possible.
To access this free calculator, . Theres no log-in, email address, or anything else required to use it.
Hopefully, these thoughts on a break even calculator for Social Security will help you build a more informed retirement plan. If you still have questions, you could leave a comment below, but what may be an even greater help is to join my.
Its very active and has some really smart people who love to answer any questions you may have about Social Security. From time to time Ill even drop in to add my thoughts, too.
Other Factors To Consider
When planning for retirement, however, theres more to consider than just dollars and cents. You could pocket the most money in the long term by waiting to start your benefits, but only if you live past the break-even point.
Thats where other factors such as your physical condition and family situation come into play. Suppose you reach claiming age in poor health. Do you expect to live long enough to make up for the payments youd forgo by delaying? On the other hand, is your spouse going to be depending on your benefits after you die? The tradeoff for starting your payments early could be lower survivor benefits for your mate.
Other income, or assets such as a pension or IRA, might affect your claiming decision. Perhaps you like your job and want to keep working well into your 60s, or you can afford to live on your savings while you delay Social Security and boost your eventual benefit. On the flip side, if youre unable to work and need the money, collecting Social Security benefits early could help you make ends meet.
A financial adviser can help you weigh the pros and cons to determine what option works best for you.
Keep in mind
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The 2 Big Problems With Break Even Calculators
Most financial planning calculations have variables that can come up and render the entire plan useless. But even knowing that, having some kind of plan increases your odds of a better outcome as compared to not having a plan.
A break even analysis is the same way: there are inherent limitations, but that doesnt mean the exercise is useless. It just means you need to understand the potential problems and not be overly reliant on the calculator you use.
When it comes to using a break even calculator for Social Security, there are two main problems that you need to understand and acknowledge first:
Problem #1: The Impossible Question
The first big problem with using the break even method in deciding when to file is that you have to answer an impossible question: How long will you live? Obviously, no one knows that for sure. The best you can do is make a guess but most people are extremely bad at estimating their own lifespan.
There are countless reasons for this, but one big explanation for why we cant reliably guess at our own life expectancy is because selective retrieval of information from memory gets in the way.
Some studies, for example, show that if a close friend recently died of a heart attack, youre probably more likely to think youll also die early.
This means that 50% of 60 years old males will die before age 83.1, but 50% will die after that age.
Problem #2) They Dont See the Big Picture
What To Consider Before Filing For Social Security
A larger benefit check sounds great, but there are tradeoffs, and soon-to-retire folks should consider multiple issues before they decide one way or the other on when to file. If you really want to consider all the avenues, then youll have to think about your finances and longevity two issues that people have a hard time grappling with.
But heres the key trade-off: you can file early and take a reduced benefit, expecting that a shorter life span will mean you receive more now, or you could file at full retirement age or later and claim a bigger check, and eventually live long enough to claim more than the first approach.
Social Security is like longevity insurance, says Brent Neiser, a Certified Financial Planner and former chair of the Consumer Advisory Board at the Consumer Financial Protection Bureau. Its a stream of payments that will not stop throughout your life, so delaying your benefits to keep those payments as large as possible forms a helpful base to your retirement plan.
Neiser urges those who have not saved enough for retirement to use whatever means possible to postpone their Social Security benefits until after their full retirement age to help boost their future income.
You can use personal savings to help bridge the gap, but ideally you should plan to work a little longer , Neiser says.
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What Is Social Security’s Break
Your break-even age is essentially when you’d come out ahead by waiting to claim rather than claiming early. When you claim before your FRA, you receive smaller checks, but more of them. Wait until later to claim, and you’ll receiver fewer, bigger checks.
In theory, the system is designed so that you should receive the same lifetime amount regardless of when you claim. But it doesn’t always work out that way, especially as retirees are living longer. If you only live until, say, 75, you’re probably better off claiming early so you have more years to enjoy your money. But if you live to 100, you’ll likely receive far more over a lifetime if you wait until age 70 to claim and receive those bigger checks.
To get a better picture of what the break-even age looks like, here’s a hypothetical example. Say your FRA is age 67, and if you claim at that age, you’d be receiving $1,500 per month in benefits. If you were to claim early at 62, your benefits would be reduced by 30%, leaving you with $1,050 per month. Wait until age 70 to claim, and you’d receive an extra 24%, giving you a monthly total of $1,860. Here’s what your lifetime benefits would look like depending on how long you live:
| Living To |
|---|
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What About Taxes On Social Security
Social Security benefits may be taxable, depending on your “combined income.” Your combined income is equal to your adjusted gross income , plus non-taxable interest payments , plus half of your Social Security benefit.
As your combined income increases above a certain threshold , more of your benefit is subject to income taxâup to a maximum of 85%. For help, talk with a CPA or tax professional.
In any case, if you’re still working, you may want to postpone Social Security either until you reach your full retirement age or until your earned income is less than the annual limit. In no situation should you postpone benefits past age 70.
If Youre Single: Finding The Cross
Conventional advice often encourages unmarried individuals to delay their Social Security start date past their FRA. But its not that simple. A decision to delay, or not, should factor in your life expectancy, family history of longevity, living expenses, and marginal tax rate. Will you be better off starting Social Security payments earlier, at a lesser monthly amount, or deferring the start date of payments and collecting a higher amount? How long will it take for the higher monthly payments to reach the cross-over, or break-even point, beyond which theyll provide you with more cumulative income than the lower payments? How long will it take past the time youd start receiving Social Security benefits at the lower rate?
To answer that question, we incorporate background information about the effects of delaying the start date for receiving Social Security benefits. We then prepare a break-even analysis that compares the cumulative cash-flow impacts of early, full, and delayed election. These analyses pinpoint how long someone needs to live to make it more advantageous to delay their start date for Social Security benefits.
Once the break-even point is reached, future cumulative benefits increase in line with the length of the deferral period.
If the individual began taking payouts even earlier say, at age 62 break-even versus waiting until the FRA of 67 would occur at age 78: a 16-year period until break-even.
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Calculating The Cost Of Your Decision
The break-even calculation is inexact annual cost-of-living adjustments, and changes in your income if youre still working, mean the amount of your monthly benefit can fluctuate even after you start collecting it. But you can still get a rough estimate of your break-even age.
Say you are closing in on 62 and considering your benefit options. You know, from checking your online My Social Security account or using AARPs Social Security Calculator, that you are in line for an estimated $1,500 a month if you hold off claiming until your FRA of 67.
Starting at 62, your payment would be 30 percent less, or $1,050 per month. So, between the ages of 62 and 67, you would receive approximately $63,000 in benefits .
If you wait until you turn 67, you give up that initial $63,000 but would receive $450 more per month, or $5,400 more per year. At that rate, it would take about 140 months to make up for the money youd forgo by claiming benefits later. At around age 78 and 8 months, you reach the break-even point, when your cumulative benefits from claiming at 67 surpass those youd get by taking retirement at 62.
You can use a similar calculation to determine the break-even age for taking your maximum benefit at age 70 in this example, $1,860 a month.
Effect Of Delaying Retirement Benefits
1Represents Full Retirement Age based on DOB January 2, 1960
2PIA = The primary insurance amount is the basis for benefits that are paid to an individual
That higher baseline would last for the rest of your retirement and serve as the basis for future increases linked to inflation. While it’s important to consider your personal circumstancesâit’s not always possible to wait, particularly if you are in poor health or can’t afford to delayâthe benefits of waiting can be significant.
Be aware that if you decide to wait past age 65, you may still need to sign up for Medicare. In some circumstances your Medicare coverage may be delayed and cost more if you don’t sign up at age 65. If you start Social Security benefits early, you’ll automatically be enrolled into Medicare Parts A and B when you turn age 65.
Your annual Social Security statement will list your projected benefits between age 62 to 70, assuming you continue to work and earn about the same amount through those ages. If you need a copy of your annual statement, you can request one or view it online on the Social Security Administration portal.
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Social Security Benefits And Divorce
In general, a divorced spouse is eligible for a maximum of 50% of his or her ex-spouses FRA benefit if he or she is at least 62, was married to the ex-spouse at least 10 years, and has not remarried if the ex is living. Divorced spouses can increase their benefits by waiting until their FRAs but not beyond and can be eligible for benefits from multiple ex-spouses, but can collect on the earnings record of only one at a time.
Filing a restricted application can be advantageous, but its available only for applicants of a certain age group.
When Should You Start Collecting Social Security Benefits
To determine when you should start taking your benefits, its important to understand how much your check is affected by when you claim your benefit. As mentioned before, you can claim your benefit as early as age 62 but reaching full retirement age can secure your full benefit.
So when exactly is the full retirement age for Social Security? That depends on when you were born.
| Year of birth | |
|---|---|
| 65 + 2 months for each year past 1937 | |
| 1943-1954 | |
| 66 + 2 months for each year past 1954 | |
| 1960 and later | 67 |
While the full retirement age used to be 65, changes to the program have increased that age. For example, those born in 1955 now have to wait an extra two months beyond age 66 to claim their full benefit. Someone born in 1959, for example, would have to wait until age 66 and 10 months to get the full benefit. Anyone born in 1960 or later, receives their full benefit at 67.
But some retirees choose to wait even longer. You may wait until as late as age 70 to claim your benefit, but then you must take it. Youll receive a bigger check for doing so.
So, what is the upside to delaying your Social Security benefit after age 62? Your check wont get hit by a serious benefit reduction. Heres how much a $1,000 monthly check will become if you claim your benefit as soon as youre eligible at age 62.
| Year of birth | If you file at 62, benefit reduced by: | A $1,000 check becomes |
|---|---|---|
| $700 |
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Whats Your Full Retirement Age
Social Security benefit calculations are based on your Full Retirement Age , determined by the year you were born. When you reach your Full Retirement Age, you become eligible for full Social Security benefits.
Born between 1943-1954? Your FRA is 66. Born in 1960 or later? Your full retirement age is 67. Those born between 1955 and 1959 have a FRA somewhere in between. As long as you wait until your FRA to elect Social Security, you will get the full benefit payments youre entitled to collect.
But every year you delay after FRA, you earn delay credits, increasing your monthly benefit for the rest of your life, and maximizing the benefit available to your spouse at your passing.
Yet many Americans may be missing the boat on maximizing their Social Security payout. According to a recent study from the Center for Retirement Research, 42% of all men and 48% of all women started claiming their Social Security benefits at age 62, the youngest age anyone can start claiming benefits.
This can result in a significant reduction in benefits. If you start claiming at age 62 when your FRA is 67, retiring 60 months early would mean a 30% reduction in benefits.