Is Filing for Social Security at age 62 to Invest the Difference Right for You?
Most everyone knows that to get the MOST out of Social Security, you must wait to file until age 70 … right?
The correct answer is ‘Maybe’. Although claiming Social Security Retirement benefits at age 70 is around a 124% more per month than age 62 monthly benefits, there may be another way.
Simple Math:
There is a popular theory with avid DIY spread-sheeters to file for Social Security right at 62, invest the monthly payments instead of spend them, then take a safe distribution rate off the investment account at age 70 to spend ALONG with the Social Security Payments as income from age 70 to age 100.
To create a case study, we used the following assumptions:
- Annual Cost of Living Adjustment (COLA) or 2.5%/year
- Investment returns of 5%/year
- A ‘safe’ annual distribution rate of 4% (1)
- Living until age 100
One would, in fact, NOT receive more over their lifetime if filing at age 62 and investing the difference!
Assuming the Average Social Security Monthly Benefit for Retirees is $1,250, from age 70-100 a person would receive $1,467,224.64 (including COLA) over their life.
IF the same person had claimed immediately at age 62, and invested the monthly benefit until age 70, the person could have about $163,203.10 in an investment account to draw ~$6,528.12/year (given our 4% ‘safe’ distribution rate from Morningstar(1)) on from 70-100 PLUS the annual $18-38k/year from age 70-100. This is a total of about $1,043,074.80.
This scenario turns out to be NOT as good as waiting until 70 UNLESS you count the age 62-29 as Income from Social Security. For the integrity of the test, we cannot count that, because the questions “Would you end up with more?”. Even if you counted the remainder of the $163k account built up, the answer is no.
For consideration:
1. Investment Allocation: Most would say the S&P 500 could easily get 7-10%/year for 8-years, but what if:
- Your age is 62 in October, 2007 (S&P500 at 1,558) and age 70 in October, 2015 (S&P500 at 2,079)? This means you only received 3.13% per year for 8 years (2). Or worse...
- Your age 62 in the Tech Boom high in August, 2000 (S&P500 at 1,518) and your age 70 was August, 2008 (S&P500 at 1,283). Yes, this would be a -2.3%/year return, and not only that, you’d be initiating distributions with the S&P500 at 735, a whopping -25% just 6 months into the distribution plan! (2)
There would need to be a heavy review and evaluation of the account that held the Social Security proceeds – with adequate diversification, sector weightings, and tax-efficient rebalance planning.
2. COLA on Social Security: The cost of living adjustments have been heaving in favor of Retirees for the past few years thanks to inflation. But there have been stretches of time where the COLA on Social Security didn’t keep up with the Bureau of Labor Statistics’ 2.5% COLA. From about 2009-2020, there was ONE Cost of Living Adjustment that was 3.6% (2011). Other than that, it was 0-2.8%, with an average of 1.4% for that 11-year timeframe! This would be a heavy anchor to the filing early strategy, as there wouldn’t be as much to invest in a booming economy. (3)
3. Health and Longevity: Social Security is a question of the probability of living past 79. If you believe your chances are good that you will live past ~79 years old, you may be better off waiting until age 70 to draw social security. If you have any sort of life-shortening conditions, we would consider taking Social Security sooner. Social Security doesn’t have a Death Benefit, so if you do not use it, you lose it!
4. Estate and Legacy Planning: Another reason some would suggest taking Social Security early is to leave an inheritance. Social Security does not offer a death benefit for most people, and some like the idea of leavings the ~$163k account of the ‘un-used’ social security for their heirs. While this is a noble idea, it is our belief that the #1 objective of retirees is to first be of no dependence on others, then #2 leave a legacy.
Conclusion:
The choice of when to take Social Security has many contributing factors including risk tolerance, financial goals, health, and other personal preference. We believe taking all these considerations into the decision of Social Security will bring the most probability of success, and confidence in our Family Wealth Plan.
Citations:
Arnott, A. C. (2023, November 13). The good news on safe withdrawal rates. Morningstar, Inc. https://www.morningstar.com/retirement/good-news-safe-withdrawal-rates
Yahoo! (2024a). ^GSPC Interactive Stock Chart | S&P 500 stock. Yahoo! Finance. https://finance.yahoo.com/chart/
Social Security Administration. (2023). Social Security. Cost-Of-Living Adjustments. https://www.ssa.gov/oact/cola/colaseries.html