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For many retirees, Social Security is their largest source of guaranteed lifetime income. Yet most are unsure of when to claim their benefits. Your options may include claiming early, waiting until full retirement age, or delaying until age 70.

One helpful concept to use is the Social Security break-even point. This is the age when claiming benefits early or delaying benefits provides about the same total lifetime payout.

In this episode of Money Wisdom, Nicholas J. Colantuono, CFP® explains how understanding your Social Security break-even point can help you make a more informed claiming decision.

How to Calculate Your Break-Even Point

To illustrate how a break-even point works, consider this hypothetical example. Let’s assume someone could collect $1,200 per month at age 62, which is close to the national average benefit at that age. If that same person waits until age 70, their benefit could increase to approximately $2,100 per month, a difference of $900 per month.

At first glance, waiting until age 70 to take Social Security may seem like the obvious choice. However, waiting means giving up eight years of benefits. Those eight years represent 96 months of payments at $1,200 per month, totaling $115,200 in missed income.

To find the break-even point, divide the missed income ($115,200) by the additional monthly benefit received by waiting ($900). The result is 128 months, which equates to a little more than 10 years. In this example, this person would need to live until age 80 before the higher benefit makes up for the income they gave up.

Need help making the right Social Security decisions? Get your free Social Security Simplified guide by texting “SOCIAL” to 800-757-0436.

Why the Break-Even Analysis Matters

Naturally, you want to maximize your monthly Social Security benefit. However, that isn’t always the same as maximizing your lifetime income. For instance, if someone delays benefits until age 70 but passes away at 75, they never reach their break-even point.

In this scenario, they would have received more total income by claiming earlier. On the other hand, someone who lives well beyond age 80 would likely come out ahead by waiting. None of us knows exactly how long we’ll live, which is why health and family history are key factors to consider in your decision.

Other Factors to Consider in Your Decision

Beyond longevity, it’s also important to consider your overall financial picture and retirement goals. If you plan to travel extensively, dine out frequently, or pursue expensive hobbies, you may need income immediately. In those cases, it can be hard to justify leaving benefits unused while taking more from other accounts.

Withdrawals from traditional IRAs may generate taxable income, while selling investments in brokerage accounts could trigger capital gains taxes. Income from these sources can also affect Medicare premiums and other tax-related considerations. For some retirees, claiming Social Security earlier can help reduce the need to draw as aggressively from other assets.

Ultimately, determining the best time to claim Social Security requires careful consideration of many factors. While break-even calculations are helpful, the best claiming strategy should fit your overall retirement plan.