Don’t Forget To Include Your Spouse
You should be extra careful with break-even calculations if you’re married.
“For a married couple, thinking in terms of break-even age is actually dangerous,” Elsasser said.
Someone who is married and looking at the breakeven is saying, “I think I should claim early because I’m not sure that I have a long enough life expectancy to cross my breakeven age,” according to Elsasser.
“There is a lot of I’s and my’s in that statement, which means there’s no concern for the impact of my decision on my spouse,” Elsasser said.
Will Social Security Still Be Around When I’m Ready To Retire
If youre wondering whether Social Security will still be around when youre getting ready to retire, thats understandable. In short, its very likely. Social Security is a program thats critical for most Americans retirement, Rhian Horgan, CEO of Silvur, explained. While there may be changes to help adequately fund it, we dont believe its going anywhere.
Social Security provides benefits to a whopping 50 million people, and is paid for by payroll taxes from over 150 million workers and their employers, according to the Social Security Administration. Future changes to the mechanisms and processes of Social Security are almost a certainty, since the program has constantly evolved to reflect the wants and needs of each new generation since 1935.
The Social Security Board of Trustees also projects that changes equivalent to an immediate reduction in benefits of about 13 percent, or an immediate increase in the combined payroll tax rate from 12.4 percent to 14.4 percent, or some combination of these changes, would be sufficient to allow full payment of the scheduled benefits for the next 75 years.
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.
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The Right Way To Use A Break Even Calculator For Social Security
Trying to decide the best age to file for Social Security Benefits? Using a break even calculator for Social Security can give you some important data to help you make the right decision for you.
A break even calculator for Social Security can help you understand which filing age will net you the highest total payments from Social Security over your lifetime.
At face value, using these calculations seems like a logical approach to making the filing decision. But its just one step in the process, as this is a complex situation with more data points to consider. Break even age is an important consideration, but that information alone cannot be the deciding factor when choosing the best filing age.
It is, however, a great starting point, so in this article well aim to make sure you walk away with an understanding of the following:
- Who should use a break even calculator for Social Security
- The problem with the calculators available today that you need to bear in mind
- How to access our one-of-a-kind Social Security break even calculator
Discount Rate Specification And The Social Security Claiming Decision
Choosing the claiming age that maximizes the expected present value of lifetime Social Security retirement benefits requires, among other criteria, the specification of a rate to use when discounting the future benefit payments for each claiming age. Although some experts maintain that the only appropriate rate is the current yield on long-term government bonds, a more appropriate rate choice would reflect the particular needs of a given individual. This article evaluates optimal claiming ages for prospective beneficiaries over a range of real discount rates from 0 percent to 8 percent, considering the survival functions for men and women born in 1952. Viewed prospectively, the optimal claiming age is older at lower discount rates and younger at higher rates. In addition, the risk that the optimal claiming age will ultimately fail to maximize lifetime benefits is highest at low discount rates and declines as the discount rate increases.
Brian Alleva is with the Office of Retirement Policy, Office of Retirement and Disability Policy, Social Security Administration.
Acknowledgments: I thank Chris Anguelov, Richard Chard, David Rajnes, Robert Weathers, Marni Cooper, Natalie Lu, and Mark Sarney for their helpful comments and suggestions.
The findings and conclusions presented in the Bulletin are those of the author and do not necessarily represent the views of the Social Security Administration.
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How To Decide At What Age To Collect Social Security
Calculating your breakeven age is helpful, but it is far from the last word on determining the right age to collect social security. Once you know the breakeven age for two benefit scenarios, you have to consider your chances of reaching that age in the context of a number of factors including health, family history and marital status.
You also have to consider the potential lifestyle benefits of collecting social security sooner, including whether you have a pressing need for that money. Finally, if you delay collecting social security, think about where you will come up with money to live on in the meantime and what you might be giving up by not investing that money.
Who’s Eligible To Receive Social Security Benefits
To qualify, you or your spouse must have worked in jobs covered by Social Security and paid the Social Security payroll tax for at least 10 years . A nonworking spouse is potentially entitled to up to half of the working spouse’s benefit. To collect benefits, you must generally be age 62 or older, disabled, or blind.
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This Factor Can Help You Estimate How Much You’ll Receive In Benefits Over Your Lifetime
When it comes to Social Security benefits, one of the biggest questions you should ask yourself is when to begin claiming them.
The earliest you can start claiming is age 62, but you’ll receive a fairly significant reduction in benefits if you claim that early. The only way to receive the full amount you’re entitled to is to claim at your full retirement age , which is 67 for those born in 1960 or later for those born before 1960, it’s either 66 or 66 and a few months depending on the exact year. And if you wait beyond your FRA to claim , you’ll receive a bonus on top of your full amount.
Image source: Getty Images.
Choosing the right age to claim is crucial because it will affect your benefits for the rest of your life. You do get one chance to change your mind after you claim, but you only have 12 months after claiming to reverse your decision, and you also have to repay all the benefits you’ve already received. So if you claim at the wrong time and wait too long to change your mind, you could be permanently stuck with your benefit amount.
What’s A Good Strategy For Spouses
A lot of couples want to start collecting both spouses’ Social Security right away, but doing so may not be the best choice if one of you earned significantly more than the other. It often makes sense for the higher-earning spouse to wait as long as possibleup to age 70. Depending on health and finances, the lower-earning spouse can collect benefits earlier.
After the death of one spouseregardless of whether it was the lower- or higher-earning onethe surviving spouse receives the larger of the two benefits for the remainder of his or her lifetime.
There are other factors and strategies to consider when filing for benefits as a couple. A financial planner or National Social Security Advisor can help you weigh your options.
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Benefit Increases Are Not Guaranteed
Every year, the Social Security Administration adjusts its benefits to keep up with inflation. In 2019, benefits increased by 2.8%.
The adjustment varies annually, and some years had no increases. The median expected cost-of-living adjustment over time is 2.6%, according to Elsasser.
If you include those increases in your calculations, you’re going to get larger numbers that look more impressive, Elsasser said.
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“That’s going to slant the calculation and the break-even age to make it look as though delaying is more beneficial quicker,” Elsasser said.
The solution: Do not include those increases in your calculations.
“If you’re going to do a break-even analysis on your own, do not include cost-of-living adjustments,” Elsasser said. “If someone else is doing a break-even analysis for you, be mindful that those numbers look big, and that’s why a lot of people use them.”
How To Calculate The 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.
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 the 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 , while your co-worker received nothing, so you are ahead. Once your co-worker starts receiving benefits, however, they get $300 more each monthor $3,600 more each yearthan you do. So when will your co-worker catch up to you in total benefits?
Lets divide 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 after your FRA. After this point, your co-worker will earn more over their lifetime than you will.
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Crr At Boston College Target Your Retirement
http://crr.bc.edu/special-projects/interactive-tools/target-your-retirement/
Description. Target Your Retirement calculates a target monthly retirement income and estimates the amounts the user will receive from Social Security benefits, retirement savings, and pensions. Users can then adjust three important leverscontrolling spending, working longer, and either downsizing or getting a reverse mortgage on their houseto assess how each strategy helps them to meet their monthly retirement income target. An audio introduction discusses the three levers. This website had almost 5,000 views in 2015 .
User inputs. Earnings, date of birth, this year’s income, and marital status retirement savings pensions and home value . A married user provides the same information for his or her spouse. Although the tool provides rough estimates of monthly Social Security benefits, it alternatively allows the user to enter the estimated benefit derived from SSA’s Retirement Estimator or his or her my Social Security account.
Should You Wait Until Age 65 To Collect Social Security Benefits
Waiting until youre 65 to collect your benefits might seem like the best course of action if youre looking to receive the most money possible later on. However, your health and estimated life expectancy are both key factors to consider when making this decision. While its certainly not everyones favorite subject to discuss, if youre in poor health and dont expect to live into your 70s or 80s, it may make sense to take benefits earlier. Conversely, if youre in great health and expect to live for another 20 years, waiting to collect Social Security is definitely something to consider.
Your marital status will also help determine when you should start taking benefits. Qualifying for Social Security spousal benefits depends on whether you’re currently married, divorced or widowed. If you do qualify, Silvur can project your lifetime benefits, as they vary from case to case.
Horgan notes that folks who have already begun taking their benefits shouldnt feel as if they missed out on savings, and that theres still time for them to earn delayed retirement credits and increase their benefits later on. If youve reached full retirement age and are collecting Social Security benefits, you can pause them for one time only, she said. This is SSA giving you a hit reset button. The good news is that if you take this option, youll continue to earn delayed retirement credits until you turn 70, which will increase your monthly benefit.
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How Does A Break Even Calculator For Social Security Work
The basic premise of a break even calculator is based on the way Social Security benefits are calculated, where the earlier you file the lower your benefit will be. Waiting longer can get you a higher benefit amount but by filing at a younger age, youll receive more benefit checks in total.
This is why you need to understand the break even point. If you file later, your benefit will be higher. When compared to the same life expectancy as filing early, youll receive larger checks but for fewer months.
The age at which filing early versus filing later results in the same amount of cumulative payments is your break even age.
For example, lets use a very basic benefit amount that doesnt include any cost of living adjustments. Lets assume that your full retirement age benefit is $2,000:
- If you file at 62 you would receive $1,400
- If you wait until age 70, you would receive $2,480
Using simple math you can see that the total benefits you would receive in each scenario would be equal, or break even, at 80 years and 4 months. For every year you live beyond this age, the choice to file later is the winner as youll have more money by waiting to claim benefits than you would have if you filed early.
But what if you dont expect to live until 80 years and 4 months? Youd actually be better off by filing for benefits sooner.
Find Out How Many Years It Takes To Break Even If You Delay Your Claim For Social Security Benefits
You can claim Social Security benefits at the age of 62 — but should you? Many people — including experts from Stanford — argue for delaying as long as possible because benefits go up the longer you wait. And there are indeed plenty of good reasons to delay. Social Security provides a guaranteed source of income for life, so waiting a little longer to maximize benefits can make sense.
But while waiting entitles you to earn delayed retirement credits, it also means you miss out on years of money you’d otherwise have received. You’ll need a higher monthly income for many years to make up for all those missed benefits and reach your breakeven point.
To decide whether it makes sense to delay, it’s helpful to know how to calculate your breakeven point and get a good idea of how long it might take for delaying benefits to pay off for you.
Image source: Getty Images.
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Defining The Social Security Break
Your Social Security break-even age represents, in theory, the ideal point in time to apply for benefits in order to maximize them. Remember, you can begin taking your benefits at age 62 at a reduced amount. But by taking your benefits at this earlier age, youll receive more Social Security checks over your lifetime assuming you reach your desired life expectancy.
On the other hand, delaying your benefits past full retirement age increases them year over year until you reach age 70. Currently, the full retirement age for most people is either 66 or 67 years old, based on Social Security Administration guidelines. If you wait until age 70 to start claiming your benefits, youd receive 132% of your regular monthly benefit amount. So the trade-off is receiving fewer checks from Social Security but the ones you do get would be larger.
Your break-even age is the point at which youd come out ahead by delaying Social Security benefits. Your actual Social Security break-even age can depend on the number of benefits youre eligible to receive, your tax situation and things like how inflation might affect the purchasing power of your benefits.
Finally How Does The Stock Market Figure Into The Equation
Generally speaking, the U.S. stock market has been on a record-setting run, but its ongoing performance is never a sure thing. What goes up can go down eventually, and a declining portfolio could have an impact on a retirees cash flow needs. If a retiree gets to a point where the declining value of their portfolio cannot sustain their cash flow requirements, then it would be an appropriate time to consider taking Social Security benefits earlier than previously planned.
Yes, deciding when to take Social Security is complicated, but its still a decision that is often integral to retirement planning. Its also a decision that many retirees seem to disregard. According to Employee Benefit Research Institutes 2018 Retirement Confidence Survey, only 23% of workers try to maximize their benefits by planning when to claim Social Security.
So, once youve determined your break-even age, I encourage you to take the next steps: Consider your individual circumstances, get some guidance, and make a plan. It could make a difference of tens of thousands for you over the years.
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