Enough with the handwaving and "I don't get it". If nothing else, I had to satisfy my own curiosity with some actual numbers. I dug out a "Your Benefits" statement from the SS Administration and plugged their figures into some calculations, using their actual numbers for monthly benefit at ages 62, 66, and 70.
All this presumes that you actually have a realistic choice between taking SS early or waiting until 66 or later; if you need it at 62 to live on, then this analysis is meaningless.
Take early, at age 62 vs. age 66 (NRA).
The first set of alternatives is:
1) Wait until 66 and collect $2286/month.
2) Start early at 62 and save up the payments of $1691. Then refile at 66, pay back the total payments collected so far, and then collect $2286/month.
3) Same as 2, but deposit the payments in some kind of interest bearing account.
Analysis, alternative 1 vs. 2:
There is no substantive diffrence between 1 & 2. You collected $81K and pay back $81K, which is the entire amount you've accumulated. That assumes you are still alive at 66! If you die before 66, then you will never collect $2286/mo. But if you start at 62 and then die before 66, your heirs will get to keep all your post-62 payments.
Analysis, alternative 1 vs. 3:
You get to keep whatever interest you've earned on the saved payments. If you've earned 4% PA compounded, you have $88K and must pay $81K, so you keep the difference of $7K.
Therefore----among these alternatives #3 it is financially best.
The second set of alternatives is:
1) Wait until 66 and collect $2286/month.
2) Start early at 62 and save up the payments of $1691, depositing them into an interest bearing account. At age 66, begin withdrawing enough from this account to make up the shortfall between the age 66 and age 62 payments. This is $2286 - $1691, or $595/month.
Analysis:
At some point after you begin the withdrawals, the account will become exhausted--this is the break even point (BEP). After that point, your net SS income will drop down to the early amount--$1691. The question is: where is this BEP?
At 0%, this will take 136 months, or 11 1/2 years, which is age 77 1/2.
At 4%, this will take 204 months, or 17 years, which is age 83.
But again, this presumes you live past the BEP. If you die sooner than the BEP, then your heirs will get to keep the balance of the assumulated savings account.
I also ran the calculations for age 62 vs. 70 and 66 vs. 70.
All this ignores COLAs and inflation, which would change the figures slightly, but not majorly.
Note:
Delayed increase past NRA to 70 is 0.6667% per month.
NRA of 66 to 70 = 32% increase.
Early decrease at 62 (vs. 66) is 0.5556% per month for 36 months, then 0.4167.
NRA of 66 to 62 = 25% decrease.
SS mortality table says (for male)
Age 62 is 18.85 yrs = Age 81
Age 66 is 15.96 yrs = Age 82
Age 70 is 13.27 yrs = Age 83
Editorial commentary:
When deciding between age 62 vs. 66, if you can earn about 3% on the accumulated savings the BEP is 15 years, which takes you to age 81, which is just about where the SS life expectancy table has you dying. If you die after 62 but before 81, your heirs get to keep the extra accumulated money. But if you live past 81, you drop down to a lower monthly payment.
When deciding between age 62 vs. 70, the BEP is about a year sooner. But you've accumulated a lot more money in your savings account for your heirs to keep depending on just when you die..
For me, taking SS at 62 is a no-brainer. There is no downside. At worst case, I break even. At best case, my BEP is 15-20 years. And if I die before NRA of 66 my heirs get to keep the accumulated savings account.
Code:
Monthly @62 $1,691 Monthly @66 $2,286 Monthly @70 $3,051
Break-even period, saving early pymnt & use it to supplement delayed pymnt.
Interest rate earned on savings accnt: 0% 3% 4% 6%
Total accumulated--age 62 to 66: $81K $86K $88K $91K
Reduction vs.66 $595
# months to use up supplement: 136 180 204 294
# years 11.4 15.0 17.0 24.5
Age when all used up: 77.4 81.0 83.0 90.5
Total accumulated--age 62 to 70 $162K $183K $190K $207K
Reduction vs.70 $1,360
# months to use up supplement: 119 164 190 289
# years 9.9 13.7 15.8 24.1
Age when all used up: 75.9 79.7 81.8 90.1
Total accumulated--age 66 to 70 $81K $86K $88K $91K
Reduction vs.70 $765
# months to use up supplement: 106 132 145 183
# years 8.8 11.0 12.1 15.2
Age when all used up: 74.8 77.0 78.1 81.2