I usually encourage people to wait until age 70 before taking Social Security retirement benefits. By waiting, you get the maximum payout. Your monthly check will be at least 76 percent higher than if you started as soon as you qualified, at age 62. If you’re married and die first, waiting will also provide your spouse with a larger survivor’s benefit.
Many people need the money, so they start their benefits at 62. But what about those with substantial investment portfolios? Even if they can afford to wait, would they come out ahead if they claimed at 62 and invested those benefits for growth?
I put this question to Bill Reichenstein, a professor of finance at Baylor University in Waco, Texas, and cocreator of one of the most powerful Social Security calculators. He adjusted for various taxes (for example, the probable tax on a higher-income investor’s Social Security income) and assumed a 2 percent annual cost-of-living increase in benefits. After running several cases at the national average life expectancy for people who are 62, he found that they all produced the same answer: Financially, it’s better to wait.
For example, say that you claim at 62 (accepting a much smaller check for starting early) and put the money into a nest egg invested half in stocks and half in bonds. You decide not to tap your savings to replace that Social Security income. You’d rather hold your income down so you can build your investments up. At 70, you start drawing on that nest egg, taking the monthly benefit you would have gotten if you had waited until 70 to collect. How long will your invested Social Security money last, after tax?
Oops, only until age 81. That just about matches national life expectancy. But on average, people in the top two-fifths of the income range live longer than that. For a 50-year-old, that’s nearly 89 for men and 92 for women. Roughly half of the well-to-do will probably exceed even that extended age. Your invested nest egg will run out, leaving you only the discounted Social Security benefit that you took at 62.
Here’s another example. Say that, at 62, you decide to start your benefits and invest them but hold your income level by drawing an equal amount out of your IRA to help pay your bills. The result is about the same — your nest egg will run out before you reach your average extended life expectancy. What’s more, claiming at 62 could raise the percentage of your Social Security benefits subject to tax, Reichenstein says.
You might think you can beat the system by investing more of your Social Security benefit in stocks and less in bonds. Maybe stocks will soar, creating a nest egg that lasts until you’re 88 or older. But there’s also a greater risk of earning even less than Social Security would pay.
You might consider starting at 62 and investing the benefits if you and your spouse are sure you’ll never need the money. That way, your heirs will inherit the account if you die early. If your health is poor, you might also start at 62, assuming your spouse will never need a larger survivor’s benefit.
But if you think that investing your benefits will beat the lifetime returns that Social Security pays, well, you can always dream.