Delaying Social Security? Payoff takes some time
Find out how long it’d take to be worth the loss
You can claim Social Security benefits at age 62 – but should you? Many people, including experts from Stanford, argue for delaying as long as possible because benefits go up the longer you wait. And there are indeed plenty of good reasons to delay. Social Security provides a guaranteed source of income for life, so waiting a little longer to maximize benefits can make sense.
But while waiting entitles you to earn delayed retirement credits, it also means you miss out on years of money you’d have received. You’ll need a higher monthly income for many years to reach your break-even point.
To decide whether it makes sense to delay, it’s helpful to know how to calculate your break-even point and get a good idea of how long it might take for the delay to pay off for you.
❚
How long does it take for delaying Social Security benefits to pay off ?
The Social Security Administration uses a formula to calculate your standard benefit amount based on your average wages over 35 years, adjusted for inflation. You’ll receive this standard benefit if you retire at full retirement age, which is 67 if you were born after 1960.
If you retire before, benefits are reduced by 5⁄ of 1 percent per month for
9 the first 36 months before FRA and an additional 5⁄ of 1 percent for each month
12 before that. If you retire after FRA, benefits are increased by 2⁄ of 1 percent for
3 each month you delay until age 70.
To figure out how long it takes for you to break even by delaying Social Security benefits, calculate how much money you’d receive over the years if you claimed early, then divide this amount by higher monthly benefits you’d receive if you delayed.
If you’d receive $1,050 monthly at 62, your annual income would be $12,600. If you claim at 62 instead of waiting until
67, you’d receive $63,000 over five years you wouldn’t have received had you delayed. Your monthly benefit, however, is
30 percent lower than it would’ve been had you waited. If you claimed at 67 and received $1,500 per month, your annual income would be $5,400 higher. To make up for the $63,000 missed, you’d need to receive this extra income for 11.7 years ($63,000/$5,400). Your breakeven point happens at age 78.6, 11.7 years after benefits started coming.
The math differs depending on your specific benefits and how early you claim or how long you delay. The chart at left provides an estimate of when you’d hit your break-even point at different ages, assuming a $1,500 benefit at a full retirement age of 67.
The annual benefits forgone don’t take cost-of-living adjustments into account. However, this provides an accurate estimate of years to break even because your COLA is based on a percentage of your initial benefit amount. This means your cost-of-living raise (if one is given) is proportionately lower if you start with a lower benefit.