The Biggest Social Security Claiming Mistake Isn't What You Think

Deciding when to claim Social Security benefits is one of the most important retirement decisions you might ever make. After all, that choice could have a direct impact on your monthly retirement income for life.

The earliest age you can sign up for Social Security is 62. If you want your monthly benefits without a reduction, you'll have to wait until full retirement age arrives, which is 67 if you were born in 1960 or later.

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Your options don't end there, though. You can also delay Social Security past full retirement age for boosted benefits. Delayed retirement credits for waiting are worth 8% a year, and you can collect them until you turn 70.

Because Social Security is designed to provide income you can't outlive, you'll often hear that claiming benefits ahead of full retirement age is a mistake. If you do so, you'll be intentionally reducing a guaranteed paycheck for the rest of your life.

But filing for Social Security early isn't necessarily the biggest mistake you can make -- or even a mistake at all, in some cases. Rather, the biggest blunder you might make in the course of claiming benefits is failing to calculate your break-even age -- the age at which you'll receive the same lifetime Social Security payout in different filing scenarios.

Why your Social Security break-even age matters

Your Social Security break-even age should play a key role in helping you decide when to file for benefits. Here's how that calculation might go.

Let's say your estimated Social Security benefit at age 67 is $2,000 per month. If you sign up at age 62, your benefit is reduced by about 30%, leaving you with roughly $1,400 per month. However, you also get 60 more months of checks compared to waiting until age 67.

Now, let's do some more math.

If you receive $1,400 a month for 60 months, that's $84,000. However, by waiting until 67, you gain an additional $600 per month.

If you divide $84,000 by $600, you get 140 months, or roughly 11.7 years. Add those 11.7 years to age 67, and you get to roughly 78 years and eight months old.

That's your break-even age. At that point, you should collect about the same lifetime Social Security payout whether you file at age 62 versus 67.

Once you know that, the decision may get a bit simpler. If you think you'll live longer than 78 and eight months, then it could pay to file for Social Security at 67. If you don't have confidence you'll reach that age, whether due to health issues or your family history, then an early claim could put more lifetime Social Security in your pocket.

Other factors to consider before claiming Social Security

Your break-even age could help you narrow down your optimal Social Security filing age. But it shouldn't be the only factor you consider.

Your retirement savings also matter. If you have enough money in your IRA or 401(k) to cover your expenses without Social Security, filing for benefits early may not hurt you financially.

Or, you could look at it the opposite way. If you retire and don't need Social Security right away, you might as well wait on benefits and let them grow.

If you're married, you'll also need to consider how your filing age might impact your spouse. If you're the higher earner and your spouse outlives you, they'll be eligible for survivor benefits. The larger your monthly benefit is, the larger a survivor benefit you leave your spouse to collect.

All told, there's no such thing as a single ideal filing age for all Social Security recipients. There are multiple factors that need to go into the decision.

But don't assume that claiming Social Security early is a bad idea. If your health is poor and you don't have a spouse to worry about, an early claim could make sense. The key is to figure out your break-even age first so that you'll know whether waiting versus filing sooner is likely to work out in your favor.

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