Let’s cut to the chase: When should you really apply for Social Security?
It’s something we get asked every day.
That’s because Social Security is not only complicated, if you listen to the news, you’ve probably heard that changes to the financially-strapped program are inevitable.
From smaller benefits, to “means testing,” to raising the retirement age, changes could include just about anything and they might be implemented at any time.
But don’t worry too much. Just make sure you get enough information so that you know the best decision for your situation.
We’re going to simplify it for you.
Consider the following:
Your age matters.
Here’s what you should know about when other people claim Social Security:
- The most popular age to file also happens to be the earliest age at which you can file – 62.[i]
- About 30% of people start taking it when they turn 65 or 66.
- Just a handful – a little less than 4% - wait until age 70 to file.
Some pre-retirees calculate their “Social Security break-even point” to help them decide when to claim. But what is it?
The ‘break-even’ point is the age at which the amount you’ll receive by claiming later (because your monthly benefit increases the longer you wait) surpasses the amount you’ll receive if you file and begin receiving benefits earlier.[ii]
Calculating a break-even point
Here’s a common social security situation. (We’ve rounded his numbers down just slightly for clarity.) Born in 1961, Charles is 58. At his Full Retirement Age (FRA) of 67, he’ll receive a benefit of $2,000 a month. Here’s how his monthly benefit amount changes depending on his age when he files:
- Age 62 - he’ll receive 70% of his full benefit totaling $1,400/month
- Age 63 - he’ll receive 75% - $1,500/month
- Age 64 - 80% - $1,600/month
- Age 65 - 86.7% - $1,734/month
- Age 66 - 93.3% - $1,866/month
- Age 67 - 100% - $2,000/month (*Full Retirement Age)
- Age 68 - his benefit increases by 8% to $2,160/month
- Age 69 - another 8% (16% total) is added to his FRA payment amount - $2,320/month
- Age 70 - a final increase of 8% (24% total) to $2,480/month
Now, Charles has a choice to make: Should he claim early, or should he wait until age 70?
So:
- If Charles were to claim early at age 62, he’d earn $16,800 a year in benefits.
- That means, by the time he turns 70, he’ll have pocketed $134,000.
- But, remember, if he waits until age 70, his monthly benefit is larger – totaling $29,760 a year.
- Waiting until age 70 means $12,960 more a year than if he claims at age 62.
- With his additional yearly income, to make up for the $134,400 he missed out on by not claiming early, once he reaches age 70, he will need to live an additional 10 years and three months (or until just over age 80) to reach his break-even point.
- Add 10.37 to age 70.
So, when Charles reaches age 62, assuming he lives to be 84 (which is the average lifespan for someone who is 62), he would earn more than $40,000 additional dollars by waiting to claim.[iii]
But these are just numbers.
And we understand that you are not a number.
We take your individual situation into consideration before we advise you about what to do.
It’s not only complex, but married couples need to be extra cautious about break-even points, because the repercussions of this decision increase two-fold. Couples need to make Social Security decisions with both people in mind, especially if one plans to claim off the other’s work record (claiming early can reduce a spousal benefit).
How to decide when to claim
The decision as to when to claim Social Security shouldn’t be made in a vacuum. And it’s certainly more involved than just calculating a break-even age.
You need to look at all your retirement savings, investments, and streams of income, then ask yourself some questions, including:
- What’s my Full Retirement Age?
- Can I afford to wait to claim?
- What are my other income sources?
- How much are they?
- What are my expenses and debt?
- Do I need money now?
- Do I want to keep working?
- How’s my health? What’s my family’s health history?
- What will my future tax obligation be?
- What’s my spouse’s situation?
And let’s not forget about the solvency and legislative risks to Social Security. Depending on your situation and the amount of savings you have, these two risks could make it prudent to claim earlier – even if you don’t need the money.
While your break-even point is good to know, at the end of the day, when to claim is a complex process that needs to consider a bunch of variables before a final decision is made. Because remember: Once you apply, there’s no changing your mind.
[i] https://www.usatoday.com/story/money/personalfinance/retirement/2018/06/19/whats-most-popular-age-to-take-social-security/35928543/
[ii] https://www.cnbc.com/2018/08/13/those-social-security-break-even-calculations-can-be-misleading.html
[iii] https://www.ssa.gov/planners/lifeexpectancy.html
