Key Points
Social Security benefits are going to be an important source of income in your senior years.
Many people make mistakes about when they claim benefits, and they end up regretting it.
Taking two steps before you claim Social Security could help you shore up your finances.
For many people, the decision about when to claim Social Security is made far too casually. Some people just file as soon as they become eligible at 62, while others start benefits simply because they’re retiring or they have reached their full retirement age.
Rushing into starting your benefits can be a bad idea, though. You should give very careful thought to your claiming decision, as it can affect your finances for the long haul. In fact, before you even consider starting Social Security, there are two things that you need to do first.
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Run a breakeven analysis
The first thing to do before starting Social Security is to run a breakeven analysis. This analysis is a key part of your retirement planning process used to determine how long it takes you to break even if you delay a benefits claim. It’s worth doing so you can decide whether to claim at a younger or older age.
For example, say you’re thinking about claiming Social Security at 62. However, your full retirement age is 67. It makes sense to consider how long it would take to break even if you delayed your benefit so you can make an informed claiming choice.
Here’s how you do it:
See how much your benefits would be at each age. You can use your mySocialSecurity account to do that.
Calculate the income you miss if you delay your benefit. For example, say you were on track for a $1,400 benefit at 62. If you delay until 67, you pass up five years of $1,400 monthly benefits or $84,000.
Calculate the extra monthly income that you get for delaying. If you wait until 67, you’d get a $2,000 benefit instead of a $1,400 one. That’s an extra $600 a month.
Determine how many months it takes to break even. That’s done by dividing the total income missed due to the delayed claim by the extra monthly income resulting from the delay. Since $84,000 divided by $600 is 140, it would take you 140 months to break even.
If you anticipate living more than 11.6 years after turning 67, a breakeven analysis reveals that you’d end up with more lifetime income if you delay your Social Security claim. It may be worth working longer or living off your retirement plans for a while to do that.
Coordinate with your spouse if you have one
The second thing you need to do is to coordinate with your spouse if you are married. That’s because your choice to claim Social Security benefits (or not to claim Social Security benefits) affects them.
For example, if you are the higher earner and you start benefits early, you shrink the survivor checks your spouse could get if you pass away first. You don’t want to do that without discussing whether it makes sense for you to hold out and increase your larger benefit while letting your lower-earning spouse claim first.
Your decisions about when to claim also affect spousal benefits. If your spouse is planning to claim spousal benefits on your work history, you have to start retirement benefits first.
Having a decision about the best way to maximize combined lifetime benefits could help your money go further and be a big win for you both.
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