Social Security “Break Even” Age

Show Notes

It’s a question we get a lot: “How old do I have to be to recoup the money I lose by waiting to take Social Security benefits?” When it comes to maximizing your Social Security benefits, timing is key! We’ll talk about that today on MoneyWise.

• WHEN TO DRAW SOCIAL SECURITY
• If you sign up for Social Security at age 62, your monthly check will be about 32-percent less than if you wait until full retirement age at 66 or 67. It’s reduced by 8-percent each year.
• By the way, your full retirement age (or FRA), is 66 and 4 months if you were born in 1956. Your FRA increases gradually to 67 if you were born in 1960 or later.
• Now, obviously, if you wait until full retirement age, your check will be 32% larger than if you take benefits at 62. But at the same time, you’re giving up around four years of those reduced benefits. That’s still a pile of money.
• So when does patience pay off in the form of the higher benefits?
• You should know that the Social Security Administration mostly uses two numbers to determine your level of benefits: 1) your average income during your highest earning 35 years of work and 2) the age when you claim benefits.
• Again, your check increases 8-percent a year from age 62 … all the way up to age 70. At that point,the 8% annual increase stops. Your benefit level,based on your work record, maxes out at 70.
• So now you’re faced with the decision: Go with a smaller paycheck at age 62 or wait to get the higher benefit check? If you wait, you start out “in the hole.” But if you live long enough, eventually the extra money you receive each month will eventually be more than the four years of reduced benefits you gave up. That’s called the “break even” age.
• The “break even” age is the point where the extra money equals the amount of money you received by claiming benefits at 62. After that, you’re “money ahead” each month because you waited.
• Of course, the two biggest factors in making your decision will be your finances and health.
• So let’s apply some numbers to the equation. If you were born in 1960 and begin taking benefits this year at age 62 your monthly check will only be around 70% of what you’d receive if you wait.
• We said that your check increases 8% for each year you wait, but more specifically, the Social Security Administration increases your check by 1/12 of that for each month you wait after age 62 … all the way up to age 70.
• So again, if you were born in 1960 and wait until you’re 70 in 2032 to claim benefits, those monthly increases will add up to your receiving 124% of your full retirement benefit.
• Here’s an example. Let’s say your cousin Bernie starts taking reduced benefits at 62, and his monthly check is $1,050. In the years before he reaches full retirement age, he’ll receive a total of 63,000 in benefits.
• You were born in the same month as Bernie, but you decide to wait until full retirement age to receive Social Security. You gave up that $63,000, but now at age 67, you’re not receiving $1,050. You’re getting $1500 a month. That’s $450 dollars more than ol’ Bernie.
• How long does it take you to catch up with him in the total amount of benefits received?
• 63,000 ÷ 450 = 140.
• That’s the number of months before your patience pays off.
• Divide it by 12 and you get roughly 11 years and 7 months.
• So you have to reach age 78 and 8 months to catch up with Bernie, and at that point, you go ahead of him $450 a month for as long as you live.
• That’s the bottom line and the answer to the question, “How long does it take to recoup lost benefits by waiting to take Social Security? Around 11 years and 7 months past full retirement age, when you’re 78, not quite 79 years old.
• Now, a few other factors may influence your decision. Social Security recipients receive an annual cost of living increase that’s pegged to inflation. This year’s increase, because inflation is on the rise, will be 5.9-percent. That’s the largest increase in 40 years.
• Continuing to work after you start receiving benefits can also increase your benefits.
• That’s a lot to think about, but again, the answer is 11 years and around 7 months to break even by waiting to take Social Security at full retirement age.

• How can you manage rising rents and other costs to be able to save and pay down debt?
• How should a middle aged person invest for retirement if they have never invested sooner?
• How can you choose the right time to start drawing Social Security benefits?

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