What If I Take Benefits Early
If you choose to take your own Social Security benefit before your full retirement age, be aware that the benefit is permanently reduced by five-ninths of 1% for each month. If you start more than 36 months before your full retirement age, the worker benefit is further reduced by five-twelfths of 1% per month for the rest of retirement.
For example, let’s assume you stop working at age 62. If your full retirement age is 67 and you elect to start benefits at age 62, the reduced benefit calculation is based on 60 months. So, the reduction for the first 36 months is 20% and then another 10% for the remaining 24 months. Overall, your benefits would be permanently reduced by 30%.
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
How To Calculate Your Social Security Break
Deciding when to take Social Security retirement benefits is important because it can directly affect your benefit amount. While you can technically start taking benefits as early as 62, youd receive them at a reduced amount. On the other hand, you could delay taking benefits up to age 70. Calculating your Social Security break-even age can help you decide when the best time is to begin taking benefits. You can do that using a Social Security break-even calculator. Additionally, it may be a good idea for you to consult with a financial advisor about when its best for your particular situation to begin receiving Social Security.
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What If I Change My Mind
If you receive Social Security benefits at a reduced rate but then change your mind, you have the option of withdrawing your application within the first 12 months of receiving benefits and paying back to the government what you’ve already received . Then, you could restart benefits at a later date to take advantage of a higher payout. Be aware that you’re limited to one withdrawal per lifetime.
For example, let’s say you elected to receive early benefits at age 62 but then decided to go back to work at age 63. You could withdraw your Social Security application, pay back the years’ worth of benefits you received, go back to work, and then wait until your full retirement age to restart your benefit checks at a higher level.
Once you reach full retirement age, another option is to voluntarily stop benefits at any point before age 70 to receive delayed retirement credits . Benefits will automatically restart at age 70 at a higher amountâunless you choose to start taking benefits before then. Note that when you withdraw your application or stop your benefits after full retirement age, you must specify if your Medicare coverageâif you have itâshould be included in the withdrawal.
Beyond The Social Security Break
As I mentioned before, calculating your Social Security break-even age can help you decide when to take your benefit, but I strongly suggest you consider other factors, including but not necessarily limited to the following:
And one more consideration about when to claim your Social Security benefit, in my opinion, is this: If you need the money now, by all means, take it.
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Qualifying For Social Security Benefits
If you were born after 1928, to qualify for the retirement-insurance benefit you must have achieved the following:
- Worked for a total of 10 years, earning the threshold wage .
- Reached age 62, the earliest age of eligibility for most claimants. However, if you apply for benefits at 62, your monthly payment will be permanently and significantly lower than if you had waited until what Social Security deems your Full Retirement Age , or later. Moreover, benefits can be further reduced if you continue to work and receive checks before your FRA.
The FRA is currently 66 for those born between 1943 and 1954 and increases by two months for every birth year afterward, until it maxes out at age 67 for individuals born in or after 1960. If you postpone election past your FRA, you will receive delayed retirement credits that increase your monthly benefit up to age 70 but no later.
Weigh Taking Early Retirement Benefits Against Full Retirement Benefits
A Tea Reader: Living Life One Cup at a Time
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.
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You Could Live Longer
Experts say there are at least two problems with relying solely on the break-even analysis when deciding when to apply for Social Security. First, many people claim early because they dont think theyll live past their break-even age and they underestimate how much time they will spend in retirement.
Workers need a solid realistic estimate of longevity, says David Freitag, a financial planning consultant with MassMutual. This should drive much of the decision about when to take benefits. Longevity is the true wild card in the filing decision.
According to Freitag, there are a number of online resources to help you estimate life expectancy. But the best way to consider longevity is to consider your lifestyle and family history, he says.
Jason Fichtner, a senior lecturer at the Johns Hopkins School of Advanced International Studies, also says using a traditional break-even analysis will lead many to claim earlier than is optimal and forgo higher monthly benefit checks later in retirement when more monthly income will likely be needed for health care expenses or to supplement other savings that may run out.
In essence, the longer you live the longer youll need money. And some might live a long time. According to Fichtner, about one out of every three 65-year-olds today will live past age 90, and about one out of seven will live past age 95.
Bridge To Medicare At Age 65
Remember that while you are eligible for reduced Social Security benefits at 62, you won’t be eligible for Medicare until age 65, so you will probably have to pay for private health insurance in the meantime. That can eat up a large chunk of your Social Security payments.
Read Viewpoints on Fidelity.com: Your bridge to Medicare
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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.
What If I Delay Taking My Benefits
If you retire sometime between your full retirement age and age 70, you typically earn a “delayed retirement” credit for your own benefits . For example, say you were born in 1960, and your full retirement age is 67. If you start your benefits at age 69, you would receive a credit of 8% per year multiplied by two . This means your benefit would be 16% higher than the amount you would have received at age 67.
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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 |
|---|
Taking Social Security: How To Benefit By Waiting
For those who are able to do so, it may make sense to wait even longer, because youll receive a larger monthly benefit even more than your full benefit. Every month past your full retirement that you delay, Social Security will increase your check by about 0.7 percent per month.
If your full retirement age is 66, then heres how much your check would increase:
| Retirement age | New benefit | A $1,000 check becomes |
|---|---|---|
| $1,320 |
So if your full retirement age is 66, then if you can wait two more years and claim benefits at age 68, youll increase your monthly check by 16 percent. In this case, if your full benefit were $1,000 a month, your new benefit would become $1,160 per month. And youll still receive cost of living adjustments on top of this amount, typically raising your payout a little each year.
Workers have other ways to grow their Social Security benefits, too, but its important to start early.
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Claiming Social Security Benefits: When Is The Best Time For You
Learn the pros and cons of claiming social security benefits at early retirement age, full retirement age, or later and decide which option is best for you.
Heres how to determine what your retirement benefits will be at different ages, and whether you should take early retirement benefits or not.
Your Retirement Options: Early, Full, and Late Retirement You may opt to receive benefits early , at full retirement age, or after full retirement age. Your full retirement age varies, depending on when you were born. It will be somewhere between 65 and 67.
If you claim benefits before full retirement age. Approximately three-quarters of retirees claim benefits as soon as they turn 62 . If you claim early retirement, youll receive approximately 20% to 30% less than you would have if youd waited until full retirement age.
If you claim benefits at full retirement age. Although this entitles you to full retirement benefits, youre actually given an incentive to wait even longer, as described next.
If you claim benefits after full retirement age. From your full retirement age until you reach age 70, the Social Security Administration will increase your benefits by a certain percentage somewhere between 5.5% and 8%. For example, baby boomers will earn a whopping 8% more for each year they delay until age 70.
But is early retirement a good option for you? The questions below will help you decide.
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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Social Security: How To Maximize Your Benefits
In brief
- A break-even analysis can identify when a stream of higher Social Security payments over a shorter period is likely to overtake lower payments that began earlier.
- If youre at or near retirement age, working with an expert can help you determine the best time for you to file for Social Security benefits.
While Social Security isnt often an important component of retirement income for high-net-worth Americans, we have found that, after a lifetime of paying into the program, our clients justifiably want to maximize their benefits. But determining the optimal solution for your particular circumstances can be challenging. In this A Closer Look, we review some of the main considerations and trade-offs involved when determining when to begin receiving your Social Security benefits.
Problem #2 The Failure To Account For Inflation
The other big problem with both the calculators available online is the absence of inflation. Failing to account for benefits increases due to cost of living adjustments skews the final numbers.
To fully understand the impact of inflation, you need to understand how the annual COLA changes your benefit amount.
When you receive your benefit estimate, it shows what the estimated benefit will be at certain ages without considering the impact of cost of living adjustments.
For example, if you are 62 and your Social Security benefits estimate says that you are eligible for a $2,000 benefit at your full retirement age, that future benefit is expressed in todays dollars. If you filed today, you would receive a reduced benefit based on that $2,000.
If you waited until age 63 to file, it would be the $2,000 plus adjustments for inflation for that year minus reductions for filing early. The same carries all the way through to age 70.
So if you want to do this calculation on your own, be sure to inflate the full retirement age benefit for every year after 62 and then reduce or increase based on filing age.
Ive seen some publications with experts recommending to not use the COLA when performing this calculation. I cant figure that out, because COLA increases will happen. Maybe not every year, but over the past 45 years there have only been three years without a COLA.
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