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Should I Collect Social Security Early and Invest It?

James · November 9, 2021 · 1 Comment

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Our topic on this episode of the Ready for Retirement podcast is about understanding if you should collect Social Security early and invest it.

Questions answered: What are the benefits of collecting Social Security early? What are the benefits of delaying Social Security? Should I collect Social Security and invest it to attempt to achieve a higher return? What is the best approach for my individual situation? 

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Key Points

  • Social Security Example
    • Assumptions
      • Let’s assume at FRA (Full Retirement Age at age 67) I can collect a benefit of $3,000/month.
        • I can collect at age 62 and collect a benefit of $2,100.
        • I can collect at age 70 and collect a benefit of $3,700.
      • If you were to live until age 90 and began collecting benefits at age 62, you would have collected a total of ~$731,000.
      • If you were to live until age 90 and began collecting benefits at age 67, you would have collected a total of ~$864,000.
      • If you were to live until age 90 and began collecting benefits at age 67, you would have collected a total of ~$932,000.
    • What is a cumulative benefit?
      • A cumulative benefit takes into consideration the total benefit (taking into consideration years collecting and amount collected).
    • Life Expectancy
      • If you expect your life expectancy to be shorter than age 78, you are likely to benefit more by collecting at an earlier age with smaller amounts, but more overall payments.
        • Between age 78-81 you will find the breakeven point.
    • Social Security
      • You will receive a cost of living adjustment, but I’m using the dollar amount because the breakeven will be the same regardless of when you collect (as they’re all being inflated by the same amount).
  • Alternative Exploration
    • What if we collected Social Security early and invested these funds?
      • As a reminder, we assumed that at FRA (Full Retirement Age at age 67) I can begin to collect a benefit of $3,000/month.
        • I can also collect at age 62 and collect a benefit of $2,100.
        • I can also collect at age 70 and collect a benefit of $3,700.
      • If you were to live until age 90 and began collecting benefits at age 62, you would have collected a total of ~$731,000.
      • If you were to live until age 90 and began collecting benefits at age 67, you would have collected a total of ~$864,000.
      • If you were to live until age 90 and began collecting benefits at age 67, you would have collected a total of ~$932,000.
    • Now let’s assume once you collect, you invest your funds and receive an average rate of return of 6%/year:
      • If you had begun collecting benefits at age 62, five years later you would have ~$147,000.
        • By age 90, your benefit would be worth ~$1,962,000 compared to the individual who collected at age 67 who’s benefit would have grown to ~$1,923,000.
          • If you were to live until age 90 and began collecting benefits at age 62, you would have collected a total of ~$731,000.
          • Investing added an additional ~$1,200,000
        • The individual who collected at age 62 would have ~$40,000 more than the individual who collected at age 67.
      • If we ran this analysis using a 5% rate of return as opposed to 6% rate of return, the individual who collected at age 67 would have had an amount higher than the individual who collected at age 62 by ~$30,000.
      • If we were to assume an 8% rate of return, it would not make sense to delay collecting Social Security because the compounding effect occurring from new payments would greatly offset the arithmetic growth of a higher monthly amount by delaying collection.
    • Collecting at Age 62 v. Age 67 (Assuming Life Expectancy of age 90).
      • If you can collect Social Security early and get a return greater than 5.5%, you would be better off to collect early and invest your money. If you aren’t able to achieve an average return of 5.5%, you would be better off waiting until age 67 to collect.
  • Real-World Example
    • It’s not often we go invest all of the funds we receive from Social Security because we use this for income.
    • Let’s assume you have a Social Security benefit of $2,000/month at age 62 and your living expenses are $5,000/month.
      • For every dollar you collect early, it allows you to leave a dollar in your investment portfolio.
      • If you were delaying Social Security, you may need to take the full $5,000/month from your investment portfolio.
        • But, if you have $2,000 coming in from Social Security, this means only $3,000 is needed from your investment portfolio.
      • If you delay Social Security your benefit will go up, but you’re drawing down your portfolio faster.
        • If the portfolio that you’re not drawing down is growing at 6%/year, that’s the equivalent of what we’re looking at in this example.
  • Social Security Benefits of Collecting Early
    • If you combine collecting early with an investment strategy for growth, you can likely enhance the total value. 
      • If you can grow by 5.5% / 6%, you will likely be better off collecting early.
    • Any unused investment amount passes down to your beneficiaries.
      • If you can collect early and invest the funds, you can pass them down to your beneficiaries. 
  • Social Security Benefits of Delaying
    • Delaying your Social Security benefit is almost like forced-saving.
      • Oftentimes individuals collect early and they end up spending these funds as opposed to investing them. 
    • You don’t have to worry about the earnings limit.
    • For 2022, if you are collecting Social Security before your FRA (Full Retirement Age), anything that you earn of $19,560 will impact your Social Security benefit.
      • For example, for every $2 of wages that you earn above this limit, Social Security will withhold $1 from your Social Security earnings.
      • If you collect early, your benefit may be withheld because of the earnings limit.
    • Social Security is more tax-advantaged than traditional income.
      • This depends on your state and where your other sources of income are coming from.
      • Provisional Income
        • 0% – 85% of your Social Security income will be included in your taxable income. 
      • Tax-Preference
        • Social Security is taxed differently than income from your IRA or 401(k).
        • You may need to grow by 7% – 7.5% to equal the analysis of initially needing 5.5% – 6%.
        • If your portfolio is in a 401(k) or IRA, you may  need additional return to reach the same breakeven point from the initial example.
    • We don’t know what the stock market is going to do.
      • Delaying your benefit reduces the risk of market underperformance or behavioral error.
        • If we could guarantee a return of 7% or higher, it’s likely going to make sense to collect early, but the market is unpredictable and doesn’t take into account our retirement goals, sequence of return risk, etc.
    • Consider your spouse.
      • What if your spreadsheet says you should collect early, but your surviving spouse is left with a lower benefit and responsibility to manage the portfolio?
      • Ask yourself if your surviving spouse would continue with this strategy or if they would prefer to not stress about it?
    • Consider your spouse (again!).
      • If you are married, consider your surviving benefit. 
        • The surviving spouse is eligible for the higher of two benefits (their own or their surviving spouse). 
        • In many cases, one spouse will delay (locking in a higher benefit) while one spouse collects early.
    • Peace of Mind
      • For many people, the Social Security benefit acts like a paycheck and you know it’s not going down.
        • If you collect early you may be better off financially, but what about if the market crashes again?
        • Oftentimes delaying can provide peace of mind knowing that you will continue to receive a higher monthly amount. 

Timestamps

2:23 – Retirement Example

5:49 – Inflation Impact

8:08 – Breakeven Point

11:49 – Compounding Growth

14:45 – Benefits of Delaying 

16:35 – What Growth You Actually Need

20:42 – Peace of Mind

23:47 – Aligning Your Investments With Your Financial Goals

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Reader Interactions

Comments

  1. Murray says

    December 17, 2022 at 3:29 pm

    Hi James-

    I appreciated this and all of the podcasts I’ve listened to. I’m happy to say that your advice generally agrees with my approach having retired almost a year ago at age 57.

    Regarding this topic, I think ignoring cost of living increases changes the outcome a bit. I’ll use my case as an example.

    My full retirement SS benefit is estimated to be $37,700 at age 67, $26,400 at 62 and $46,800 at 70.

    Similar to what you mentioned, total benefit starting at age 70 passes age 62 around age 80-81 for me with no return or COLA. With a 6% return, that age moves well into my 90s.

    If I apply a 3% COLA from today to start of benefits, my starting benefits grow to $30,700 at 62 & $68,800 at 70 with both increasing 3% annually after that. The lifetime benefit would equal out around age 79 with no return and age 85 with a 6% return based on my calculations.

    One other point you touched on which was an aha moment for me a few years ago, my goal isn’t to maximize my net worth at death, it’s to not run out of money before then. Delaying social security reduces that risk by increasing my tax advanced income later in life regardless of market fluctuations. In my opinion, reducing risk is far more important than when or if my lifetime benefits will be maximized.

    Thanks!
    -murray

    Reply

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