Should You Take Social Security Early & Invest It?
By Roger Nusbaum, AdvisorShares ETF Strategist
Gil Weinreich noted in an article at Seeking Alpha that the number of people taking Social Security when they are first eligible at 62 has declined sharply. Citing data from the Center for Retirement Research at Boston College, in 1996 56% of men aged 62 claimed Social security compared to 35.6% in 2013.
The decision of when to take Social Security is obviously very important but there are countless approaches on when the best time is and most of them are quite sound. Take it at 62, live off the government’s money while preserving your own. Take it at 62 because you don’t usually start coming out ahead until your late 70’s and there is no guarantee you will live that long. Take it at 70 because the payout is 76% greater than at 62 and 32% greater than at most people’s FRA (full retirement amount). And everything in between.
Spousal benefits open up a whole other jar of complexities. President Obama took away deeming (a spouse takes the lower of his/her own benefit or the spousal benefit at 62 letting the other one grow and then switching). While this reduces the potential maximum that people will get it does make things a little simpler and won’t make any shortfalls in the system worse. My wife doesn’t have her own benefit, her only choice is the spousal benefit. She is six years younger than me so if I wait to take my benefit then she will get more if I die early. This resonates with me.
How can I or anyone say that someone is wrong for wanting to take it at 62 whether it is for either of the two reasons I mentioned above, or any other reason. Neither of the two I mentioned for taking it early resonate with me but they are not on their face, wrong. The point is making informed decisions not making the decision that someone else feels is best. The risk of not living to my late 70’s is low actuarily based on my parents and grandparents. If no male in my family ever made it to 70 I might view that one differently as an example.
In Gil’s above linked article there was one reader comment that stuck out to me as being very interesting. It was about taking it at 62 investing the payment. I’ve obviously seen the idea before but the way he worded made me want to explore it a bit. My payout at 62 would be about $1800 in today’s dollars. If the $1800 were the only earned income then it would not be taxable. If total earned income was between $32,000 and $44,000 then 50% of the $1800 would be taxable (still probably resulting in a small amount owed) and above $44,000 85% would be taxable.
That detail aside, $1800 times 12 times eight years until age 70 would add up to $172,800 plus whatever return assumption you want apply if this interests you. Assuming a linear 4% annual average return (bad assumption of course) then the pot would be $206,000 which is not insignificant. Social security grows at 8% per year. In financial planning terms 4% is nice a conservative baseline, the higher your return assumption the less conservative. A plan that relies on beating 8% might be a stretch for most people.
Another thing to consider is that Social Security is reduced when earned income is greater than some level ($16,920 in 2017). In both comments about taxes I specifically used the word earned because these two tax-related drawbacks don’t apply to passive income. Google it for more specifics but passive income applies to rents collected (usually but not always) from investment property but not from investment portfolios.
Hopefully this post frames the question as there are countless variables to everyone’s individual circumstance. Taking capital market risk to beat a guaranteed 8% bump that goes with deferring Social Security doesn’t resonate with me but of course it will resonate with some folks and they’ll go that route.