Most working people know about the tradeoff when starting Social Security benefits: start early and you receive benefits for more years; start later and you’ll get more each month.
Basically, the decision is a bet on how long you live. If you outlive your official life expectancy, starting benefits late brings you more money. And, obviously, if you die before you start benefits you get nothing.
That’s why it’s worth considering a third option that splits the difference: starting early but socking the money away, allowing it to grow. If you’re lucky, investment gains will offset some of what you lose by receiving less each month.
Benefits depend on your earnings during your working life and, to some extent, when you were born. A person born between 1943 and 1954, for instance, is entitled to a “full” benefit at age 66.
By choosing to receive benefits at 62, this person would reduce the monthly payment by 25%, receiving, for example, $750 instead of a full $1,000. Postponing the start to age 70 would increase the payment to $1,320.
The idea is to provide roughly the same amount if the recipient lives the expected number of years. A man aged 66 today is expected to live to a little over 83, for instance. If he lived to that age and were entitled to $1,000 a month at 66, he’d receive $189,000 if he had started benefits at 62, $204,000 if he started at 66 and $206,000 if he started at 70, not including inflation increases.
If the recipient died 10 years early, at 73, he’d receive $99,000 if he started at 62, $84,000 if he started at 66 and $47,500 if he started at 70, making the early start a clear winner for anyone who dies young.