Risk and Reward of Withdrawing Social Security Benefits to Invest Them, #261

This week, I’m addressing a listener's question: Should you collect Social Security at age 62 and invest the money, or wait until your full retirement age, or even age 70, for a bigger benefit?

I break down the math and the risks, weighing the advantages of guaranteed annual increases and cost-of-living adjustments against the potential (and pitfalls) of stock market returns. 

I also explain key rules, such as the earnings limit for early filers, tax implications, and who might benefit from collecting early.

Whether you’re eager to take Social Security as soon as you can or are considering holding out for a larger payment, listen in for the practical insights you need to make a smart decision for your financial future.

You will want to hear this episode if you are interested in...

• [03:27] Earnings limits on collecting your Social Security benefits.
• [05:29] Where to invest to potentially achieve more than 6% return.
• [07:37] Consider delaying Social Security benefits, but weigh the risk of investing against guaranteed returns.
• [12:39] Collect Social Security early to invest if you don't need it for living expenses and want to leave a larger inheritance.
• [13:42] Wait to collect Social Security until full retirement age or 70, especially if dependent on it for income or if you're the higher-earning spouse, to maximize benefits.

Social Security’s Built-In Return for Waiting

First, it’s essential to understand how Social Security rewards patience for those born in 1960 or later; claiming at 62 results in a significant reduction, down to just 70% of your full retirement benefit.

Each year you wait between 62 and your full retirement age (67 for most), your benefit grows by about 6% per year. From 67 to 70, that growth jumps to 8% per year.

This increase is essentially a “risk-free” return, as it's guaranteed by the government, not subject to market swings. 

The Pitfalls of Early Claiming and Investing

It’s not uncommon to hear the argument that you could claim benefits early, invest the money (usually in the stock market), and potentially earn more over time. But this approach is riskier than you might realize.

• Market Volatility: Historically, a diversified stock market fund (like a total market index fund) has surpassed 6% annual returns over long periods, but not always. Roughly 10% of five-year periods since 1926 have lost money. That means there’s a real chance you'll underperform Social Security’s consistent increase, or even lose principal.
• Taxes: Investment returns, especially dividends, are taxable, which further erodes your effective return. Social Security also may become partially taxable depending on your income, especially if you claim while still working.
• Earnings Limits: If you’re working between 62 and your full retirement age, you face earnings limits. For example, in 2023, you can only earn $23,400 before your benefit is reduced, making early claiming unattractive for those who don’t plan to retire immediately.

The Power of Cost-of-Living Adjustments (COLAs)

Over the last ten years, annual cost-of-living adjustments (COLAs) have averaged 2.6% per year. COLAs are applied to your current benefit, so the longer you wait and the higher your starting base, the more you benefit from these increases.

Over the decades, this compounding effect can create a significant gap in monthly income between early and later claimers.

That means, to truly keep up with waiting, you’d need not just to match the 6-8% annual increases but also beat COLAs, meaning your investments would need to return nearly 9% per year, consistently, and after taxes.

Who Might Consider Claiming Early?

While waiting typically yields the best results for most retirees, there are exceptions. Early claiming might make sense if:

• You have significant wealth and don’t need Social Security to live (your goal is to leave a bequest for heirs).
• You have health issues and a below-average life expectancy.
• You’re single and want to maximize your estate since Social Security benefits don’t pass to non-spouses.

However, for the majority, especially married people or those relying on Social Security as a main income source, waiting yields more lifetime income and a more robust safety net for both spouses.

Timing your Social Security claim isn’t about grabbing the first check you can; it's about weighing guaranteed growth against market risk, tax implications, earnings limits, and your own longevity and needs. 

Resources Mentioned

• Retirement Readiness Review
• Subscribe to the Retire with Ryan YouTube Channel
• Download my entire book for FREE 
• State Street's Total Stock Market Index Fund

Connect With Morrissey Wealth Management 

www.MorrisseyWealthManagement.com/contact

 

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