It pays to delay claiming Social Security benefits
But go beyond the break-even analysis
How will you decide when to claim Social Security?
Many would-be beneficiaries use a break-even analysis which, in essence, tells them the age (or ages) when it makes the most financial sense to claim benefits.
Using this sort of analysis can be helpful. But experts say it shouldn’t be the only factor you consider when deciding when to apply for Social Security. Why? Well, first it’s worth explaining how to calculate the break-even age.
Calculating break-even
You start the analysis by calculating what your cumulative benefits would be based on the age you apply for Social Security.
So, let’s say you’re projected monthly benefit is $2,871 if you apply for Social Security at your full retirement age of 67; $2,054 if you file at age 62; and $3,706 if you file at age 70.
And let’s say you apply for Social Security at age 62. After 10 years, your cumulative benefit would be $246,480. If you started at age 67 your cumulative benefit would be $172,260 and if you waited to claim until age 70 your cumulative benefit would be $88,944. This means if you claimed at age 62 and died before age 72, claiming early produced the highest cumulative benefit.
But what happens after 20 years when you’re 82? Well, if you claimed at age 62 your cumulative benefit would be $492,960. If you filed at age 67, however, your cumulative benefit would be $516,780; and if you filed at age 70 it would be $533,664. This means if you claimed at age 62 and lived past age 82, claiming later, at age 67 or 70 for instance, produced the highest cumulative benefit.
And the longer you live, the greater the financial benefit there is to wait. Consider what happens after 30 years. If you claimed at age 62 your cumulative benefit would be $739,440; if you filed at age 67 it would be $861,300; at age 70 it would be $978,384.
Bottom line: If you delay receiving benefits until age 70, it takes 10 years to break even with benefits begun at age 62, but it takes 11 years to break even with benefits begun at age 67. And benefits begun at age 67, take 13 years to break even with benefits begun at age 62.
Elaine Floyd, the director of retirement and life planning at Horsesmouth, says those who have yet to claim Social Security should always calculate the value of the total amount of benefits they stand to receive, and how much higher that value can be if they claim at 70 vs. 62.
“Their Social Security statements don’t show this,” she says. “A couple can receive as much as $500,000 more in total benefits if they delay claiming. And this assumes average life expectancies of 84 for men and 87 for women.”
You could live longer
Experts say there are at least two problems with relying solely on the break-even analysis when deciding when to apply for Social Security. First, many people claim early because they don’t think they’ll live past their breakeven age and they underestimate how much time they will spend in retirement. “Workers need a solid realistic estimate of longevity,” says David Freitag, a financial planning consultant with MassMutual. “This should drive much of the decision about when to take benefits. Longevity is the true wild card in the filing decision.”
According to Freitag, there are a number of online resources to help you estimate life expectancy. But the best way to consider longevity is to consider your lifestyle and family history, he says.
Jason Fichtner, a senior lecturer at the Johns Hopkins School of Advanced International Studies, also says using a traditional break-even analysis will lead many to claim earlier than is optimal and forgo higher monthly benefit checks later in retirement when more monthly income will likely be needed for health care expenses or to supplement other savings that may run out.
In essence, the longer you live the longer you’ll need money. And some might live a long time. According to Fichtner, about one out of every three 65-year-olds today will live past age 90, and about one out of seven will live past age 95.
Calculate for both of you
Many would-be Social Security beneficiaries also fail to consider the effect claiming early will have on their surviving spouse’s Social Security benefit. In essence, claiming early permanently reduces the survivors benefit while waiting to claim at least until full retirement age means your survivor will receive the highest possible benefit. A surviving spouse typically receives the deceased spouse’s benefit. If the deceased spouse claimed early at age 62, however, the survivor’s benefit could be 25% to 30% less than it could have been.
Heather Schreiber, the founder of HLS Retirement Consulting, gave this example: If you are a married couple, particularly with a wide disparity in Social Security income benefits, the latter of the couple to survive will rely exclusively on the benefits of the higher wage earner at the first spouse’s death.
“Therefore, it is important to view a break-even analysis from the perspective of the cumulative lifetime benefits of the couple rather than being singly focused,” she says. She notes that the inflation-adjusted income benefits from Social Security are, often, the only income source that is guaranteed to last a lifetime.