Deciding when to claim Social Security retirement benefits is one of the biggest financial decisions retirees make.
Some social media influencers recently claimed to have cracked the code on that decision, but experts say the calculations they’re using lack important context.
Some influential people argue that people should start collecting Social Security retirement benefits as early as age 62. That’s because if you delay, your monthly check may be higher, but if you start early, your accumulated benefits could be even higher.
The idea is based on the “break-even” age, the point at which delaying benefits results in more total income than claiming sooner. That’s usually in the late 70’s or early 80’s.
The Social Security Administration once provided a break-even analysis for retirement recipients. However, SSA eliminated this practice in 2008 following concerns from internal and external stakeholders and researchers that it could distort claims decisions.
A subsequent study published in 2011 by the RAND Corporation, a nonprofit think tank, found that break-even analysis can have a “very powerful effect” on encouraging individuals to claim benefits early, which could permanently reduce the size of their monthly checks.
Why the break-even point is the “wrong framework”
One big problem is that no one knows when they will die, making break-even analysis inaccurate. Additionally, you can think of Social Security as longevity insurance that prevents you from outliving your savings.
“I continue to believe that break-even analysis is the wrong framework for considering when to receive Social Security retirement benefits,” said Jason Fichtner, a former Social Security Administration executive who worked for the agency when it stopped using the assessment.
Mr. Fichtner previously held positions at the SSA, including acting vice chair and chief economist. He is currently a senior fellow at the National Academy of Social Insurance, a nonprofit organization focused on social safety net programs, and executive director of the LIMRA Retirement Income Institute, a research initiative within the insurance industry organization LIMRA.
Rather, Fichtner and other experts argue that retirees should consider other factors when deciding when to claim Social Security retirement benefits, especially how that timing will affect the size of their monthly checks.
If you claim at age 62, you get the minimum monthly benefit. Recipients who wait until full retirement age (typically ages 66 to 67 based on year of birth) receive 100% of their earned benefits. Fichtner says you can get the most benefits by waiting until age 70, with monthly payments increasing by 77% compared to waiting until age 62.
“Another way to frame this argument is to understand that a charge at any age before age 70 is a penalty,” Fichtner said.
In the break-even framework, people who claim to be 62 may have an advantage initially, but once they reach their personal break-even age, they will be left behind for the rest of their lives, Fichtner said.
Here are some other factors that experts say you should consider when deciding when to claim Social Security.
Think about how long you can live
By starting with the question, “How long will I live?” Future beneficiaries will get a different answer than asking, “How much longer will I live?” says Joe Elsasser, a certified financial planner and president of Covisum, a Social Security claims software company.
Similarly, the Social Security Administration states in educational materials that “retirement may be longer than you think,” and many people will live longer than the average life expectancy.
Take into account the rest of your financial plan
By focusing solely on break-even analysis, prospective Social Security recipients neglect to consider a complete financial plan, Elsasser said.
This includes how their income affects their taxes and how benefit income affects the rest of their portfolio, Elsasser said.
Although some people advocate investing your Social Security money early, it’s important to remember that investment returns are not guaranteed. However, individuals who delay claiming Social Security will see their benefits increase by 8% for each time they wait from full retirement age to age 70. This is a guaranteed return that is difficult to match in the market.
Make a plan for you and your spouse (if married)
If one spouse earns a higher wage, “break-even should not be used as a decision-making point,” Elsasser says.
High-income earners may consider their longevity when deciding to claim benefits. But if a spouse’s remaining life expectancy is not taken into account, survivor benefits for a high-income earner could be significantly reduced if the spouse dies, Elsasser said.
think about what makes you happiest
Waiting for a claim can be difficult, especially if you have concerns about your income or health.
But Elsasser said his clients who waited until they were 70 to claim were the happiest because they received higher monthly benefits. Additionally, they don’t have to worry as much about market fluctuations affecting their income.
“There’s a lot less stress on the portfolio,” Elsasser said.
