Let’s say you decide to take Social Security at age 67 at $3,000/month. You would forgo the opportunity to take Social Security at age 62 at $2,100/month. You will have a lost opportunity cost to receive $126,000 over 5 years. The question is, when do you break even on your decision to wait for $900/month more at age 67?

The break-even point would be around age 79. If you do not live past age 79 it would have been more beneficial to take Social Security earlier.

What if you decide to wait until age 70? The break-even age would be around age 82.

Other Factors to Consider When Making a Decision

While break-even calculations can offer valuable insight into the optimal timing for claiming Social Security benefits, relying solely on them is not advisable when making your decision. There are several other factors to consider such as financial situation, health and longevity, spouse’s age and benefit amount, tax brackets, Medicare, retirement earnings test, and will you be working between the ages of 62 to 70.

Your Financial Situation

Other factors to consider:

• Do you have a guaranteed pension? Does it provide a COLA?
• Do you have assets you can draw income from?
• Do you have long-term care insurance?
• Are you working full-time or part-time?

Typically, advice you will see on Social Security is targeted toward private sector employees and will suggest working longer and delaying benefits for the highest payout possible. This guidance stems from the fact that many private sector workers lack access to pensions and often have insufficient savings. Consequently, they must rely heavily on Social Security as their only source of income in retirement.

However, the Social Security strategy for a federal employee is more nuanced and complex. Many federal employees benefit from substantial, COLA-adjusted pensions, along with robust savings. This is an important distinction as it allows federal employees more options when determining when to take Social Security, primarily the decision to take sooner rather than later. This distinction is crucial, given federal retirees’ income sources are not solely dependent on Social Security.

Health and Longevity

When deciding the ideal age to start receiving Social Security benefits, it’s essential to factor in your health status and family history of longevity. If you enjoy good health and have a family history of longevity, it’s likely beneficial to wait longer before claiming benefits. Conversely, if your health is poor, you might consider taking Social Security earlier to optimize the benefits you receive. 

Spouse’s Benefit and Age

If you’re married, it’s important to consider your spouse’s benefits. Claiming Social Security earlier might lead to reduced survivor benefits for your spouse. This could result in a lower benefit amount for him/her, especially if their Social Security amount is lower than yours. In the event of your passing, your spouse would receive the higher of the two benefit amounts between the two of you.

Estimated Income: Taxes & Medicare

If you’re currently working and in a higher tax bracket, but anticipate being in a lower tax bracket during retirement, delaying Social Security could be advantageous. This strategy can help you avoid being taxed at a higher rate and maximize your overall retirement income.

Consideration should also be given to Medicare. Medicare Part B and D premiums are income-based. If you’re still working, it might be prudent to postpone claiming Social Security to avoid pushing your Medicare premiums into a higher monthly bracket. This situation could arise if you’ve retired from federal service and embarked on a second career, work part-time, or own a small business. 

Retirement Earnings Test and Working

If you’re working and haven’t reached your full retirement age (FRA), it’s important to be mindful of the earnings test. Claiming Social Security before reaching your FRA and surpassing the income threshold of $22,320 could result in receiving none of the benefits, and in certain cases, you may never recover all the benefits withheld by the SSA.

If you are below your FRA, there is a $1 reduction for every $2 of earned income above $22,320. In the year a person is reaching their FRA, there is a $1 reduction for every $3 earned income above $59,520.

An easy rule: if you are working and earning above $22,000, then you should delay taking Social Security. Once you hit your FRA, the earnings test no longer applies and you can earn any amount above the limit. Be mindful of the tax brackets if you are working and receiving Social Security after FRA.

You can learn more about the retirement earnings test here.