Your monthly Social Security benefits get bigger the longer you wait to begin collecting between ages 62 and 70. But how long do you have to live before holding off on collecting benefits will pay off?
In other words, where is the break-even point? When do the bigger monthly benefits add up enough to offset the self-inflicted penalty of postponing benefits?
That's one of the toughest mathematical knots you've got to untie as you decide when to start collecting Social Security.
It can even influence your decision about when to retire.
Social Security: Your Three Main Choices
At ssa.gov, you'll find calculators that help you figure out your Social Security benefits as a single person based on when you plan to retire and how much you'll have earned year by year through retirement.
Be prepared to perform several comparative what-if calculations. The process is the same for married joint filers. But the numbers come out differently.
Basically, you want to compare three scenarios. What if you start to collect benefits at age 62? How does that compare to starting benefits at age 67? And how do both of those compare to starting benefits at age 70?
Why each of those? The earliest that you can start to collect Social Security benefits is age 62. But you are penalized for starting before what the Social Security Administration (SSA) calls full retirement age (FRA).
Be aware that the SSA has rules that complicate calculations for people born on Jan. 1 of any year. Let's say you were born Jan. 2, 1961. For someone born Jan. 2, 1961, FRA is age 67.
If your monthly benefit at age 67 would be $1,000, it would be just $700 at age 62.
If you continue to hold off on collecting, your monthly starting benefit continues to climb until age 70. At that point, you don't gain anything just by continuing to postpone the start of collecting.
Benefits are based on your income in your 35 highest paid years. So what happens if you continue to work and earn income beyond age 70? One or more high-income years in your seventies might replace one or more of your low-income years from your twenties or thirties. That could boost your benefit. But that's different from a boost based solely on delaying the start of benefits.
Suppose You Earn $100,000
Let's also suppose that you are a single taxpayer who earns $100,000 a year now at age 61. Unless you plug in year-by-year income figures, Social Security calculators plug in the average yearly earnings going back in time for every single filer earning $100,000 at age 61.
What's the result?
If you start to collect at age 62, your initial annual benefit will be $20,075, or about $1,673 per month, according to number crunching by Heather Schreiber, founder of HLS Retirement Consulting.
Schreiber, also creator of the Social Security Advisor newsletter, notes that the SSA customarily waits one month before starting to send benefits. So in the first year in this scenario, you would collect only 11 payments.
If you wait until age 67 to start collecting, your initial yearly benefits will be $31,658, or about $2,638 per month.
And if you hold off until age 70? Then your benefits will start at $41,668, or about $3,472 per month.
Is Waiting A No-Brainer?
At first glance, postponing the start of benefits seems like a no-brainer. Waiting until age 70 lands you a benefit that is slightly more than twice as big as your benefit at age 62.
But what about the eight years of benefits that you would collect between 62 and 70? How much is that worth? The answer: $186,131.
And remember, on average, each year benefits rise because of cost of living adjustments granted by the SSA. Schreiber's calculation assumes COLAs based on 2% average annual inflation.
Read this other IBD report to see how much income you need to get the maximum Social Security benefits.
Where's Your Break-even Point?
So how long does it take for cumulative benefits that start at age 70 to surpass the $186,131 head start in benefits that you get by starting them at age 62? The answer is eight years. If you begin to collect at age 70, by November of the year you reach age 78 you'll have banked $435,074 in Social Security money.
That edges past the $433,922 in total benefits you would have banked if you started at age 62. That's the break-even point for age 70 vs. age 62.
The SSA deposits 99% of the benefits it dishes out directly into recipients' bank accounts now. The days when the SSA sent everyone paper checks is history.
The break-even point for starting at age 70 vs. starting at age 67? That's at age 80, also in December. Then, your cumulative benefits total $549,340. That surpasses the $548,906 that you'd have received if you started at age 67.
Social Security For A Long Life
What happens if you live another five years? At age 85, your age-70-start benefits will total $843,460. That's $179,057 more than if you started benefits at age 62.
And it's more than $57,000 greater than your benefits starting at age 67.
If you reach age 90, your cumulative benefits would be more than $1.168 million vs. $847,703 if you start at age 62. Your cumulative benefits would total nearly $1.048 million if you began at 67.
For retirement planning purposes, Schreiber offers pointers. "If you are a healthy single person and your family has a history of long lives, you can aim to start collecting Social Security benefits later. If you do live a long life, you benefit from reaching and passing the break-even point," she said.
But if you are single and ill or can't count on longevity being on your side? "You might as well bet on the sure thing and start collecting benefits at an earlier age," Schreiber said.
The break-even point basically occurs at the same age for all single people, regardless of income year by year. That's because the government wants to create a level playing field for recipients. "So, in theory, whether you file at 62, 67 or 70, you should get the same cumulative benefit if you live to your average life expectancy," Schreiber said.
The situation for married couples collecting two Social Security payments can vary. The rules for spousal benefits can boost the incentive for a lower earning spouse to start collecting early.
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