It would seem to be an easy calculation to advise a single client when to start taking Social Security benefits: Decide how long the client thinks he will live and determine the break-even point.
The Social Security Administration deducts money from a recipient's check for each month the person takes benefits before his full-retirement age and adds money for each month she delays beyond full-retirement age. The amount that would be received if a person started taking benefits at full-retirement age is called the primary insurance amount.
The break-even point is the age at which total benefits received by delaying to receive a higher monthly benefit surpasses the total benefits received by starting as early as possible and receiving lower monthly payments.
However, like most questions with Social Security, there is no easy answer here, says one of the leading experts on Social Security, William Meyer, founder of Social Security Solutions and author and lecturer on the subject.
Full retirement for most people retiring now is 66 years old. That will gradually increase to 67 years of age for those born after 1959.
The first thing Meyers acknowledges is that Social Security rules are very complicated and a financial advisor can add substantially to his value to a client by understanding the rules.
The break-even age is usually about 80. The problem is that this is not a fixed number and there are ‘lumpy benefits,’ as Meyer puts it.
In fact, the worst times for a single individual to begin taking monthly benefits are the two times when most start getting benefits: at full-retirement age or at the earliest retirement age of 62, Meyer says.
If a beneficiary has a spouse or dependents, there are a lot of factors to consider before taking benefits. But for a single person, the primary consideration is the way the monthly increases are calculated. They are not increased at an even rate, which is why ‘lumps’ develop.
The difference is not easy to explain, says Meyer, who is co-author of a popular book on Social Security, Social Security Strategies: How to Optimize Retirement Benefits.
“Most consumers, advisors and academics think there is no strategy related to when a single person should take Social Security,” Meyer says. “Common theory is that a person receives less if they start early and more if they delay.”
A person receives approximately 75 percent of their primary insurance amount (depending on when they were born) if they start at age 62 and 132 percent if she delays to age 70. With an average break-even age of 80, a person has to live to be more than 80 to make it worthwhile to delay getting benefits until they are 70.
But the increases are not steady. Between age 62 and 63, monthly benefits increase 0.42 percent of the primary insurance amount per month. Between age 63 and 66, monthly benefits increase 0.56 percent of the primary insurance amount per month. And between ages 66 and 70 monthly benefits increase 0.67 percent of primary insurance amount per month.
“This uneven playing field creates opportunities to optimize benefits,” Meyer says.
Assuming a full-retirement age of 66, the break-even point for delaying benefits from 62 to 63 is 78 years. But the break even point of delaying benefits from 63 to 64 actually goes down to 76 years. The break even point then climbs if benefits are delayed until late in the 66th year, when the break-even point drops again for a few months. The break-even point then climbs again for each delay in receiving benefits until the person hits 70.