Should I Collect Social Security Early and Invest it?

Summary

This video explores the decision of when to start collecting Social Security benefits, comparing the traditional approach of delaying for higher payments with an alternative strategy of collecting early and investing the funds. It delves into how early collection, if invested at a 6% growth rate, could result in more money by age 90 than delaying benefits. The video also highlights the tax advantages, market protection, and survivor benefits of delaying. Ultimately, it emphasizes the importance of tailoring the decision to individual financial goals, retirement needs, and life expectancy.

Takeaways

• 😀 Collecting Social Security early can provide more immediate income, but it reduces your long-term benefits.
• 📅 The breakeven point for collecting Social Security at 62 versus 67 is typically around age 78, and for 62 versus 70, it’s around age 81.
• 💰 By collecting early and investing the benefits, you can potentially come out ahead by growing your money at a 6% return, especially over the long term.
• 📈 Early collection of Social Security allows you to leave more money in your investment portfolio, enabling compounding growth.
• 💡 Traditional analyses only consider cumulative benefits but don’t factor in the opportunity cost of potential investment growth.
• 🧐 Delaying Social Security until 70 maximizes your monthly benefit, but the higher amount is spread over fewer years compared to early collection.
• 📊 Investing early Social Security benefits at a 6% return could lead to significantly higher portfolio values by age 90 compared to delaying benefits.
• 💸 The tax treatment of Social Security benefits is different from other retirement income, which affects the after-tax value of early versus delayed collection.
• 💼 Early collection reduces the strain on your retirement portfolio, but it requires more careful investment to maximize the benefit.
• 👨‍👩‍👧‍👦 For couples, delaying Social Security can provide a higher survivor benefit for the spouse left behind, adding security to the long-term plan.

Q & A

What are the three main options for collecting Social Security benefits?

The three main options are: 1) Collect early at age 62 with a reduced benefit, 2) Collect at full retirement age (typically between 66 and 67) with the full benefit, or 3) Delay collection until age 70 to maximize benefits with delayed retirement credits.

How does the breakeven point between collecting early or later vary by age?

The breakeven point between collecting at age 62 versus age 67 is around age 78. For those choosing between age 62 and age 70, the breakeven point is typically around age 81. This means that if you live past these ages, the later collection option could result in more total benefits.

What is the opportunity cost when collecting Social Security early?

The opportunity cost refers to the potential growth of your portfolio. By collecting early, you are taking more income today, which reduces the amount of money available to grow in your investment portfolio. This could affect the long-term financial picture, especially if you don’t invest those early Social Security payments.

How does investing early Social Security payments affect the financial outcome?

If you collect Social Security early (at age 62) and invest the benefits, assuming a 6% annual return, you could end up with significantly more money by age 90 compared to waiting until age 67 to collect. In one example, investing early resulted in an additional $40,000 by age 90 compared to delaying.

What growth rate was assumed in the analysis for investing Social Security benefits?

The analysis assumed a 6% annual return on invested Social Security benefits. This return rate significantly impacts the long-term financial outcomes, making early collection and investment more favorable compared to waiting.

What are the tax implications of collecting Social Security early versus later?

Social Security benefits are taxed differently than distributions from other retirement accounts like IRAs or Roth IRAs. The higher your Social Security benefits, the more advantageous it is from a tax perspective compared to withdrawing funds from taxable accounts.

Why might some people choose to delay Social Security benefits despite the potential for greater growth from investing?

Some people prefer delaying Social Security for the peace of mind that comes with receiving a higher guaranteed income. Delaying benefits also helps protect against market risk and sequence of return risk, where market downturns could negatively impact retirement portfolios.

What is the Social Security earnings limit, and how does it impact early collection?

The earnings limit for Social Security is $19,560 per year. If you are collecting Social Security early and earning above this threshold, your Social Security benefits may be reduced. For every $2 earned over the limit, $1 of Social Security is withheld.

How does the decision to collect Social Security early or later impact a spouse's benefits?

Delaying Social Security can increase the surviving spouse’s benefit if one spouse predeceases the other. The surviving spouse may continue to receive the higher benefit. This is an important consideration in the decision-making process for couples.

What are some of the risks associated with delaying Social Security benefits?

While delaying benefits can result in a higher monthly payment, it also comes with the risk of not living long enough to fully benefit from the increased payments. Additionally, people who delay may face challenges if they don’t invest or manage their own finances wisely during this time.