What Is Breakeven Age For Collecting Social Security
So there is a trade-off between when you start collecting social security and the size of your benefit but what does this trade-off look like? The following table is based on an example provided by the Social Security Administration. It assumes a person would be entitled to a $1,300 benefit upon reaching full retirement age at 66 years and 4 months.
If you start collecting benefits at this age.
your monthly benefit will be
As you can see, each year you delay collecting raises the benefit. The amount of those increases varies, but on average the dollar amount increases by 7.4 percent each year. However, it would be inaccurate to liken delaying to earning a 7.4 percent return on your money because that doesnt take into account that the earlier you start collecting, the more years worth of benefits you get.
In fact, this is the heart of the dilemma: you will come out ahead at first by starting to collect benefits earlier, because you will receive those benefits for more years. However, if you live long enough, eventually the larger benefits you would be entitled to if you waited longer would catch up with the amounts you would have earned by collecting earlier.
Heres an example: Using the above figures, suppose you could start collecting a $953 monthly benefit at age 62. By the time you reach age 70, you will already have collected a cumulative total of $91,488 in benefits.
Should I Wait To Start My Social Security Benefits
Presented by Tim Weller
The first step in making your decision is to determine your full retirement age the age at which you can collect your full benefits. For workers born between 1943 and 1954, the FRA is 66 for those born later, the FRA gradually increases to age 67. Claiming benefits prior to your FRA can reduce your monthly payment by as much as 30 percentbut you will receive benefits for a longer period. If you postpone claiming benefits beyond your FRA, your social security payment will increase by a certain percentage, depending on your year of birth, until you reach age 70.
Its important to consider your options carefully. The decision to claim benefits early can result in a lower standard of living for the rest of your life. And claiming later can mean more financial security for your surviving spouse.
The benefit reduction incurred by claiming early is permanent. If you elect to start receiving benefits early, your benefits will still be increased annually by cost-of-living allowances. But despite social securitys annual inflation adjustment, your payments may never equal the benefit that you would have received by waiting until your FRA.
What timeline is best for you? You can crunch the numbers using AARPs Social Security Benefits Calculator, available at www.aarp.org/work/social-security/social-security-benefits-calculator.
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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Weigh Taking Early Retirement Benefits Against Full Retirement Benefits
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People nearing retirement can implement a number of strategies to cover living expenses during their post-working years. Although retirement plans, such as 401s and IRAs, are part of a retirement strategy for many, Social Security benefits are the most common source of income among retirees. The benefit is a guaranteed amount that you can start receiving as early as age 62, or you can wait until 70 to receive the highest monthly payment.
Various factors impact how much Social Security income you get when you start claiming benefits. To determine the optimal age to start taking benefits, you need to calculate your Social Security breakeven age to ensure that you balance payments versus longevity.
Qualifying For Social Security
Before one is provided the opportunity to choose a start date, one must qualify for social security. Not every American is covered under the social security system. Federal and many state workers are covered under retirement programs that do not include Social Security.
The following factors are used to determine to qualify:
- Earnings History how much did you make and paid into the Social Security system.
- Work History How many years did you contribute to the Social Security system. Social Security uses your 35 highest earning years, adjusted for inflation and a maximum earnings cap, to determine your base payout level.
- When You Were Born You must be at least 62 to begin collecting Social Security on your own account.
Assuming you are eligible to collect Social Security benefits based on your work history and age, the next choice is when to begin collecting.
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Problem #1 The Inability To Compare Filing Ages
One of the basic limitations of most calculators is that they give you no ability to choose various filing ages to compare them. Most of these calculators offer you the option to input the numbers directly from your Social Security statement: Age 62, Full Retirement Age, and age 70. Thats it.
This would be fine if individuals only filed for benefits at those ages. But obviously thats not how a real-life scenario works. For these calculations to be useful, you need to be able to compare your benefit across all filing ages, down the specific month.
A Comparison Of Free Online Tools For Individuals Deciding When To Claim Social Security Benefits
The authors are with the Office of Retirement Policy, Office of Retirement and Disability Policy, Social Security Administration.
Acknowledgments: Brian Alleva, Tom Hungerford, Natalie Lu, Barbara Smith, and David Timmons provided helpful input and suggestions. Special thanks to Anya Olsen for her extraordinary support.
The findings and conclusions presented in this note are those of the authors and do not necessarily represent the views of the Social Security Administration.
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Questions To Ask Yourself
From a purely mathematical point of view, most people are better off waiting to start collecting their social security benefits, but there are questions you need to ask yourself.
Do you need the cash? If you need help paying for basic living expenses, you probably should elect to begin receiving benefits as soon as possible.
How is your health? According to the most recent Social Security Administration life expectancy tables, a healthy 65-year-old females average life expectancy is 86.6. Further, one out of every four will live past age 90.
In any case, it is important to consider your familys pattern of longevity. The longer you live, the more you benefit from delaying. If your health and family history predict a long life, you may be better off delaying your benefits until FRA or later.
If you dont expect to attain a normal life expectancy and you are single, consider taking benefits early. But if you are married, be aware that doing so will reduce your spouses survivor benefit.
Will you continue to work? If your working wages are greater than $18,240 in 2020 and you selected early benefits, your social security benefits will be reduced by $1 for every $2 you earn. If you earn more than $48,600 in the year you reach your FRA, your benefits will be reduced by $1 for every $3 you earn. After that point, working has no effect on the amount of your benefit, although it may impact whether your benefits are taxed.
To Wait Or Not To Wait
Consider taking benefits earlier if . . .
- You are no longer working and can’t make ends meet without your benefits.
- You are in poor health and don’t expect the surviving member of the household to make it to average life expectancy.
- You are the lower-earning spouse, and your higher-earning spouse can wait to file for a higher benefit.
Consider waiting to take benefits if . . .
- You are still working and make enough to impact the taxability of your benefits.
- Either you or your spouse are in good health and expect to exceed average life expectancy.
- You are the higher-earning spouse and want to be sure your surviving spouse receives the highest possible benefit.
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Why You Need A Retirement Plan
Saving for retirement can feel daunting, particularly if youre behind. You might have a vague idea of the amount you need to save and feel so overwhelmed by the figure that you put off retirement savings indefinitely.
A plan can change all that. Every major life event and decision requires a plan. You might manage daily tasks with a to-do list, stay on top of your eating habits with an app, or help your child manage college applications with a planner and list of weekly goals. Retirement is the same. You achieve your goals by knocking out a little bit at a time. Over the course of months, years, even decades, you can get there.
So what should a good retirement plan be?
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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Factor In Mortality And Marriage
Of course, the trick to coming out ahead by starting to collect social security later is to live long enough to reach the breakeven age.
Whether or not you will be able to do that, though, is impossible to know. The Social Security Administration does provide a life expectancy calculator that can provide some general guidance. For example, according to this calculator, a 62-year-old male can expect to live to age 83.6. In the example given earlier, the breakeven age for coming out ahead by delaying collecting social security was 80, so on average it would make sense for a person in that situation to delay collecting social security to earn the maximum benefit.
However, the life expectancy calculator is based on average life spans. Your health and family history are also important considerations in estimating how your life span is likely to relate to the average.
It also makes a difference if you are married. Survivor benefits for spouses are increased if you delay when you start to collect social security. So, if you are married, there is a better chance that at least one of you will live long enough to reach the breakeven age. According to the Social Security Administration, a married couple at age 65 today has a 50-50 chance of at least one spouse living till age 90.
What Other Factors Should You Consider When Deciding To Collect Social Security
Before you decide to collect Social Security based on your break even point, you should also consider how collecting early or delaying could impact the benefit your spouse receives.
Since the Social Security formula benefit is based on an individual’s 35 highest earning years, women often collect less in benefits than men because of career breaks during motherhood and overall lower lifetime earnings. However, the Social Security spousal benefit erases some of the disparity in Social Security earnings between men and women.
The spousal benefit is available to all spouses, regardless of whether the spouse has a work history or not . The spousal benefit is up to 50% of the higher earner’s benefit and in order for a spouse to receive the benefit, the higher-earner must be collecting their own benefit.
The Social Security administration automatically determines whether an individual would earn more in Social Security benefits if they collected on their own work record versus their partner’s work record.
For example, if the higher earner receives a $2,000 monthly benefit, the spouse is eligible to receive up to $1,000, depending on whether they choose to wait until full retirement age, says Kiner. For example, if someone collects the spousal benefit four years before full retirement age, their benefit will be 35% of the higher-earner’s benefits.
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How To Calculate Your Breakeven Age
One way to understand breakeven age is by thinking of your benefit choices as two different potential streams of income. In the example given above, you would have a choice of earning $953 a month beginning at age 62 or $1,681 a month beginning at age 70.
Multiply those monthly amounts by 12 to get their yearly value, and then project the cumulative amounts earned each year into the future. The smaller stream of income would have a head start because it would begin at age 62, while the larger stream wouldnt start till age 70 but would start catching up from that point on. If you look at the cumulative total for each stream of income from then on, you can see when the breakeven point is reached.
Since different people are entitled to different social security benefits, your breakeven age will depend on the amount of your benefits. You can get an estimate of what social security benefits you are entitled to by using the Social Security Administrations Retirement Estimator.
Be advised that this tool only provides an estimate of your benefit. But this estimate provides you with a sense of what benefit amounts you may be entitled to at different ages, and you can use those amounts as the basis for your breakeven calculation.
Financial Engines Social Security Retirement Calculator
Description. This retirement planner guides the user through the following four steps: Who’s included on your retirement journey? When do you plan to start Social Security? Can you get more from Social Security? Your Social Security Plan. The tool highlights claiming strategies that will maximize the user’s lifetime Social Security benefits. The planner had over 80,000 visitors in 2015 .
User inputs. In step 1, the user enters name, date of birth, annual salary, gender, life expectancy relative to average, and marital status . A married user enters his or her spouse’s information as well. Step 2 presents estimated annual Social Security benefit amounts for each claiming age from 62 through 70, with age 65 preselected as the default claiming age. By clicking on Edit information, the user can select an alternative claiming age and is also able to enter actual benefit estimates directly from SSA’s Retirement Estimator or the user’s my Social Security account.
Advantages. Users can create and compare custom strategies for one- or two-person households in various marital and survivor statuses. The action plan provides the specific claiming date that would maximize lifetime Social Security benefits for the selected life expectancy assumption. The initial selection and the proposed strategy are shown side by side to highlight the effects of different claiming ages on annual and lifetime benefits.
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Supplementing Your Social Security Income
For many retirees, the income they receive from Social Security is not enough to live off of: According to AARP, the estimated average Social Security monthly benefit in 2022 is $1,657. If you haven’t started saving for retirement it’s essential to start early so you can take advantage of the power of compound interest .
If your company offers an employer-sponsored 401 with matching contributions, you should prioritize receiving the match because it’s essentially free money.
You might also consider opening an individual retirement account, either a traditional IRA or a Roth IRA, both of which have unique tax benefits.
With a traditional IRA, individuals invest pretax income and don’t pay taxes until they withdraw their earnings. With a Roth IRA individuals invest after-tax money so their withdrawals are tax-free. A Roth IRA is considered a good option for those who anticipate being in a higher income tax bracket in retirement: Rather than paying higher taxes later on, you’ll pay taxes on your contributions upfront.
A Roth IRA, however, is not available to everyone. For 2022, the income limit for single-filers is $144,000 and for married couples filing jointly it’s $204,000. Companies like Vanguard, Wealthfront, Betterment, and Fidelity Investments all provide traditional and Roth IRA options.