This Social Security Filing Tip Is Worth Real Money

There's a lot of advice out there to help you make decisions about your Social Security benefits. In fact, figuring out the details about your retirement checks can be downright overwhelming.

It's worth trying to learn as much as you can to navigate your benefit choices and try to maximize this source of inflation-protected lifetime income.

The good news is that there's one simple tip that just about everyone can learn and understand, and it can make a huge difference in the Social Security income that you end up with throughout the course of your life.

Here's the tip you need to take into account as you make decisions about your retirement benefits.

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Don't overlook this critical Social Security tip

The single best tip to maximize your Social Security is to understand how to calculate your break-even point and to go through the calculation before deciding when to claim benefits.

See, you are entitled to receive a standard Social Security benefit called your primary insurance amount (PIA). You get your PIA if you claim at exactly one specific time: your full retirement age (FRA).

FRA is based on birth year. If you were born in 1959, for example, your FRA is 66 and 10 months. And for anyone born in 1960 or later, it is 67. That means you would have to start claiming checks at exactly 66 and 10 months or exactly 67 to get your PIA if you were born during this time.

If you claim before your FRA, you shrink your benefit. Early filing penalties apply each month to reduce your PIA. If you claim after your FRA, you increase your benefit. That's thanks to delayed filing credits that increase it.

Since you can claim your Social Security benefits any time between age 62 and 70, these early filing penalties and delayed retirement credits can make a profound impact on the amount of your benefits. If you claim early, you'll get a larger number of smaller checks during your lifetime, and if you claim late, you'll get fewer checks, but they have the potential to be much larger.

You need to calculate how long it will take you for the increased monthly income you collect by delaying to make up for the months of income that you missed thanks to waiting. Doing that is called calculating your break-even point.

The purpose of calculating your break-even point is to try to see if you are likely to live long enough to break even, because if so, a delayed claim would be your best option for when to claim benefits.

How can you calculate your break-even point?

You need to determine how much income you'll miss and how much extra income you'll get because of the delay, and divide the first number by the second.

To do the calculation:

• Decide what two ages you want to compare. For example, you could compare 62 and 67 to see how long it would take you to break even if you claim Social Security at the youngest possible age versus at your FRA. Or you could compare 62 and 70 to see how your benefit would change if you claim at the earliest age vs. maxing out your delayed retirement credits.
• See how much your benefit would be at each age. Your online Social Security account can give you these numbers, or you can do the math yourself by applying early filing penalties and delayed retirement credits to your standard benefit. The penalties equal 5/9 of 1% for the first 36 months and 5/12 of 1% for any prior month, while the delayed retirement credits equal 2/3 of 1% per month. If your standard benefit was $2,000, claiming at 62 would result in a 30% reduction to $1,400.
• Figure out the amount of income you pass up. If you're deciding whether to claim at 62 or 67, you pass up five years of income. If you've reduced your benefit to $1,400, that's five years of $1,400 monthly benefits or $84,000.
• Figure out how much extra money the delay earns you. In our example, it's $600 ($2,000 at 67 vs. $1,400 at 62).
• Determine how many months of extra income you need to make up for the delay. Since you're getting $600 extra per month and you have to make up for $84,000, divide $84,000 by $600 to get 140 months or 11.6 years.

Once you know this information, you can decide if you want to claim at 62 or 67 based on whether you think you'll live long enough to break even.

Doing this exercise as part of your retirement planning can help you choose an optimum strategy for your Social Security.

Then you can make other plans based on what you've chosen, such as making sure you have enough in your 401(k) to support you if you retire before a delayed Social Security claim or making sure you have enough in your IRA to cover your costs as a supplement to Social Security if you delay benefits but retire sooner.

Be sure to follow this tip, so you can make the right choices about this important retirement income source and enjoy the retirement you deserve.

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