Knowing this number could help influence when you claim benefits.
One of the best ways to prepare financially for retirement is knowing just how much different sources will account for your retirement income. Whether it’s a 401(k), IRA, dividends, or Social Security, you should have a rough idea of the role they’ll play.
Social Security plays a large role for many people, but it’s not always easy determining when you should claim your benefits. One number that can help guide your decision is your breakeven age, which is the age where the total value of higher but fewer monthly payments equals the total value of lower but more monthly payments.
When you take benefits influences your monthly payments
To see the breakeven age in action, it’s important to understand how the timing of when you claim your Social Security benefits affects your monthly payout. Your full retirement age (FRA) — which is based on your birth year — is the age you’re eligible to receive your full monthly benefit. For people born in 1960 or later, their FRA is 67.
| BIRTH YEAR | FULL RETIREMENT AGE |
|---|---|
| 1943 to 1954 | 66 |
| 1955 | 66 and 2 months |
| 1956 | 66 and 4 months |
| 1957 | 66 and 6 months |
| 1958 | 66 and 8 months |
| 1959 | 66 and 10 months |
| 1960 or after | 67 |
DATA SOURCE: SOCIAL SECURITY ADMINISTRATION.
You don’t have to wait until your FRA to claim benefits. You can start as early as age 62. But doing so will lower them based on how many months away from your FRA you are. For people with a FRA of 67, claiming benefits at age 62 will lower them by 30%.
You also have the option to delay retirement benefits until age 70, increasing them by 2/3 of 1% each month (8% annually). This means someone with a FRA of 67 could increase their monthly payout by 24% by delaying benefits until 70.
If you were to start claiming benefits at 62, you would receive lower monthly payments, but for a longer time. If you delayed them until 70, you would receive higher monthly payments, but for a shorter time. The breakeven age is when these two amounts meet.
How breakeven age can play out
Let’s imagine your full monthly benefit at FRA is $1,500. If you started claiming at 62, your monthly benefit would be reduced by 30% to $1,050. If you waited until 70, your monthly benefit would increase by 24% to $1,860.
Assuming you claimed at age 62, you would have received $163,800 in benefits by age 75. However, if you delayed benefits until 70, you would’ve only received $111,600 in benefits by 75.
However, after another five and a half years past age 75, you would’ve received around $233,100 in benefits by taking them early at 62 ($1,050 * 222 months) and around $234,360 by delaying until 70 ($1,860 * 126 months). This means your breakeven age would be between 80 and 81.
At age 81, the total benefits you would receive by having waited until 70 would exceed the total benefits you would have gotten by claiming at 62.
Breakeven age should be one factor to consider
Knowing your breakeven age can undoubtedly be helpful in deciding when to claim Social Security benefits, but it shouldn’t be the only factor you consider. Health, life expectancy, financial needs, family situation, and other retirement income sources are also important considerations.
If you expect to live longer than average or don’t “need” the money, waiting until 70 to claim could result in significantly more total benefits over your lifetime. However, if you have urgent financial needs or health concerns that could affect your lifespan, it might make more sense to claim early.
When you claim Social Security is a decision that’ll have a tangible effect on your retirement, so consider all aspects before deciding. Most importantly, it’s essential to be aware of all the factors that could influence or be influenced by when you claim.
