The Social Security Gamble: Early Claiming and Investing – A Risky Path to Riches?
The age-old question of when to claim Social Security continues to plague the minds of older Americans. The lure of accessing funds early, at age 62, is tempting. Yet, conventional wisdom dictates that patience pays off, with benefits reaching their maximum potential at age 70. Delaying claiming leads to larger monthly checks, seemingly guaranteeing a greater lifetime payout. But what if there’s a way to outsmart the system? Could claiming early, at 62, and investing those smaller checks lead to a more prosperous retirement?
Before delving into this tantalizing possibility, it’s crucial to understand the Social Security bonus system. For individuals born in 1960 or later, the full retirement age is 67. Claiming at this age grants access to the "full" benefit. Opting for early claiming reduces the monthly payment, with the minimum benefit at 62 being 30% smaller than the full amount. Conversely, delaying claiming past 67 increases the check by roughly 8% per year. According to Laurence Kotlikoff, a Boston University economist specializing in retirement trust funds, this system effectively provides a 76% bonus for those who wait until 70 to claim.
To illustrate this, the Social Security Administration offers a compelling example. An individual claiming at 62 might receive $1,400 per month, whereas waiting until 70 boosts the monthly check to $2,480. Based on longevity data, a 62-year-old man can expect to live until age 83.6, receiving checks for 21.6 years. At $1,400 a month, this translates to a lifetime income of approximately $362,600, excluding cost-of-living adjustments. However, delaying until 70 reduces the payout period to 13.6 years but increases the monthly benefit to $2,480, resulting in a lifetime benefit of around $404,200.
This scenario clearly demonstrates the financial advantage of delaying claiming until 70. However, the allure of early access and the potential for investment gains remains a significant consideration. The question then becomes: can investing the smaller Social Security checks from age 62 outperform the Social Security bonus system?
Financial experts offer varying perspectives on this strategy. Kotlikoff unequivocally labels it "stupid," emphasizing the "enormously strong return" offered by the government for patience. The 8% annual increase, coupled with cost-of-living adjustments, is a powerful incentive to delay. Keith Singer, a certified financial planner, echoes this sentiment, stating that "most investors aren’t going to get returns that beat the 8% rollup and inflation aspect of Social Security."
However, the appeal of early claiming and investment persists. Jim Sohan, a 65-year-old retiree, highlights the opportunity cost of waiting: "The amount you get increases 8% a year, but you have to wait to get that. You’re not getting any return while you’re not receiving Social Security." Sohan, who claimed Social Security at 63, is considering investing the funds, viewing it as "playing with the bank’s money."
Claiming at 62 provides an eight-year head start compared to claiming at 70. However, the checks remain smaller, forever forfeiting the 76% bonus. To compensate for this, investment returns must be substantial. Robert Brokamp of The Motley Fool emphasizes that "to beat Social Security’s quote-unquote return, you’d have to be investing in the stock market."
The stock market, however, is inherently volatile. Monique Morrissey, a senior economist at the Economic Policy Institute, cautions against this approach, labeling it "pure gambling – and really dumb for most people – to assume they’ll beat this high, guaranteed return by investing in the stock market." She suggests that only those who are independently wealthy should consider this strategy, given that the vast majority of Americans rely on Social Security for essential expenses.
Despite these warnings, some investment experts maintain that beating the Social Security system is possible through early claiming and aggressive investment. This requires investing all of the funds, maintaining consistent investment over many years, and achieving a consistently high rate of return. According to a Motley Fool analysis, earning 5% annually on invested Social Security dollars could make early claiming beneficial, at least until around age 90. Beyond that age, the larger checks from claiming at 70 prove more advantageous.
However, this strategy is fraught with perils and pitfalls. The primary concern lies in the risk associated with investing Social Security dollars in unpredictable financial markets. Caleb Silver, editor in chief of Investopedia, underscores this responsibility: "You’re taking on the responsibility of investing it to generate those returns. You have to be ready to take that risk."
Ultimately, the decision of whether to claim Social Security early and invest the funds is a personal one, requiring careful consideration of individual financial circumstances, risk tolerance, and investment expertise. While the allure of potentially outperforming the Social Security system is enticing, the inherent risks and complexities make it a gamble that may not be suitable for most retirees. The guaranteed returns and inflation protection offered by delaying claiming remain a compelling argument for patience, ensuring a more secure and predictable retirement income stream. The potential rewards of early claiming and investing may be significant, but they come at the cost of increased risk and the potential for long-term financial consequences. Before embarking on this path, careful consultation with a qualified financial advisor is essential to ensure that the decision aligns with individual financial goals and risk tolerance.
