Most people don't know how long they will live. For the purposes of Social Security planning, that presents a challenge.
While your monthly Social Security retirement benefit will increase with every year you wait to begin collecting between ages 62 and 70, pledging to wait until age 70 may turn out to be a poor strategy if you step in front of a bus at age 69. Conversely, you may regret beginning to collect at age 62 if you live to sample the cake at your 95th birthday party.
But while it's rarely certain how long anyone will live, longevity should still be a primary concern when you decide when to begin collecting your Social Security benefits, says Theodore Sarenski, CEO and president of Blue Ocean Strategic Capital in Syracuse, New York.
For example, he says that those who are in ill health or have a family history of shorter lifespans may wish to consider taking their benefits before their full retirement age.
“If no one in your family has ever made it to 77, maybe you don't want to start (collecting benefits) at 66,” Sarenski says.
But if your likely longevity is less clear than this example and you're undecided on when to begin collecting your benefits, how can you weigh the decision to collect now against the decision to wait?
This is where the concept of a “breakeven age” comes into play.
What is a breakeven age?
In Social Security terms, a breakeven age is the age you'll be when the cumulative payouts for two benefit start dates equal each other.
If that sounds complicated, consider this example: John has decided to take his Social Security retirement benefits early at age 62. His monthly benefit is $1,500, or 75 percent of the $2,000 he would have gotten each month had he waited until his full retirement age of 66. So from the time he starts collecting until his full retirement age of 66, he'll collect $72,000 in benefits.