The complexities of Social Security calculations can cause some confusion around when someone eligible should file and claim their benefit. The best place to begin is understanding your eligibility.

Like most government programs, Social Security has many layers, and it is not always clear when and how some should begin taking their benefit, because being eligible doesn’t necessarily mean you should turn the benefit on.

Social Security benefits can be turned on as early as age 62, and each year the benefit is delayed, you receive what is called delayed retirement credits (DRCs). These DRCs guarantee an 8% automatic increase to your Social Security benefit for every year you delay up to age 70.

In the middle of this age band, there is something called your FRA (full retirement age). This is the age when you are eligible to receive the full benefit without an offset for having earned income. (Earned income is income from employment and is different than income received from investments, pensions, or annuities.) For those born in 1960 or later, your FRA is age 67.

How Social Security benefits are calculated

The benefits are calculated by the Social Security Administration (SSA) by taking 35 years of earnings that are indexed for inflation. Any years you didn’t work, a zero is added to your record which negatively impacts your benefit. These annual amounts are then totaled and divided by 420 months to arrive at the monthly figure known as your average indexed monthly earnings (AIME). However, this is not your benefit amount. The SSA then applies a formula to your AIME that determines your primary insurance amount (PIA), and this is your monthly Social Security benefit.

If you choose to take your benefit before your FRA while employed, there is an offset that can significantly reduce the benefit if your income exceeds $21,240 in 2023. This reduction is $1 for every $2 of earned income over the limit.

In the year you reach your FRA, the limit increases to $56,520 in 2023, with a benefit reduction of $1 for every $3 of earned income over the limit. After you have reached your FRA, there are no earnings limits, and you receive the full benefit with no income offsets.

Some Social Security benefits are taxed

When it comes to taxes on Social Security, there is something called provisional income. Once benefits are turned on, there are tax rules that are different from ordinary income that you need to understand. Your provisional income is calculated by taking your adjusted gross income plus half of your Social Security benefit. That total is your provisional income. If that total is less than $25,000, your Social Security benefit is not subject to federal tax. If it’s above $25,000 but below $34,000, 50% of the benefit is taxed, and if it’s above $34,000, 85% of the benefit is taxed.

As you can see, there are many factors that contribute to how the benefits are calculated, but there are a few other rules worth mentioning.

If you’re a government employee, there is something called a Windfall Elimination Provision (WEP) and Government Pension Offset (GPO).

There are also rules and benefits for non-working spouses that allows them to use secondary (auxiliary) benefits calculated off their spouse’s work record that is different than a spousal benefit.

You also have widow and divorced benefits available, but we aren’t going to get into all these details now. (You can read about those in the article How to Qualify for Social Security Spousal and Survivor Benefits.)

In my book Common Sense, I take a deeper dive into these other areas and explain how to navigate different filing strategies. You can also access more information by going directly to the Social Security website.

Now that the foundation has been laid, there are three things I want to share with you that are common conversations that I have with clients as it relates to Social Security. However, the decision when to take your benefits requires a comprehensive evaluation of your situation, and what I am sharing is not meant to be advice.

1. Consider your break-even point

One method for deciding when to take Social Security benefits involves calculating the break-even point. This is the future point in time when the value of one option equals that of another. For example, if your full retirement age (FRA) benefit is $2,000 per month and $1,400 at age 62, there’s a $600 monthly difference. (It’s important to understand that if you opt for the reduced benefit at age 62, this becomes your permanent monthly amount and remains unchanged even when you turn 67.)

If you begin your benefit at age 62, you’ll receive a reduced payout for five years before your full benefits would have otherwise begun (age 62-67). During this five-year period, the total benefits amount equals $84,000 ($1,400 x 60 months). Compared to if you delay your benefit until age 67 and then begin receiving the $2,000 per month, your break-even point would occur in 11.6 years.

In other words, prior to the break-even point, you would receive more from Social Security by beginning the benefit at 62. However, after the break-even point, more would be received by delaying the benefit.

Something to keep in mind: By taking a benefit early, you reduce the amount of spousal benefit made available since the benefit was reduced. This may be an important consideration when weighing your choices.

2. Consider your health and longevity

I often hear clients argue that they may not live another 11 years, making this a significant factor in their decision-making process. Factors like poor health or family history could prompt someone to start collecting benefits as soon as they’re eligible, fueled by concerns about missing out if they die prematurely.

From their perspective, it’s a win-win situation: They start receiving benefits early, and if they live longer than expected, the payments continue.

While it would be easier to make this decision if we knew our life-span, it’s up to you to decide what’s best for your situation. However, if you’re in poor health, taking benefits early might be a reasonable option.

3. Consider your retirement income

We have covered the higher-level considerations inside Social Security itself, but there are other factors in play that take priority over waiting for the maximum benefit, and that is the need for current income.

Many clients we work with see Social Security as a piece of their retirement income strategy and aren’t as concerned with break-even points as much as they are with maximizing their other assets.

If income is needed, and there is a choice between allocating assets for income or turning Social Security on early, we have found that many people elect to go with their Social Security benefit.

The reasons for this are many, but in most cases, it is the desire to maintain the growth of their existing assets. Yes, the delayed credit of 8% is guaranteed growth backed by the government, but there are other considerations at play.

If we use the $1,600 per month example from earlier and calculate what it would take to generate this amount of new income, we find it difficult to calculate. The reason it is difficult is because there is an unknown variable called the stock market and economic policy.

At the time, interest rates are higher than what we would consider normal, and markets are not reliable enough to provide a consistent income stream. So, determining how to create the income can pose a problem. We can make assumptions about market performance, but Social Security is a sure thing backed by the government, which has access to a money-printing machine.

Our human propensity is to find shortcuts and rush to conclusions, but this is not a decision to rush. The conversation about Social Security is actually not a conversation about Social Security as much as it is about retirement income, and that requires careful planning. Therefore, it is imperative to speak with a financial planner who knows how Social Security works and understands how to generate income from assets.