Once you hit age 62, what’s an investment class that can give you a high guaranteed return with almost no risk? Bonds? Equities? Commodities?
Nope. Social Security.
There’s just one catch. You can’t actually get your hands on the money until you’re 70.
One of the most common issues for those approaching retirement age is determining the right time to file for Social Security. If you file at age 62, you will receive benefits longer. Yet your monthly benefit for the rest of your life will only be about 75% of the monthly amount you will receive if you file at your full retirement age of 66 to 67. If you wait even longer, the benefit amount is higher still.
Those who are unable to work and don’t have sufficient retirement savings may not have a choice about filing for Social Security early. Those who don’t have a compelling need for early Social Security income may still consider early filing as an option, with the idea of investing the money for their later retirement.
According to a recent article by Karen DeMasters in Financial Advisor magazine, this is not a good choice. She cites research done by William Meyer and William Reichenstein of Social Security Solutions Inc. in Leawood, Kansas.
One big drawback to investing your Social Security benefits is the penalty you pay if you are still working. If, between age 62 and your full retirement age, you earn more than $15,120 a year, your benefits are reduced. So you’d start with a smaller benefit amount, have it cut even further, and not be left with a whole lot to invest.
Even more important, however, is a number that Meyer and Reichenstein emphasize: 8%. This is the amount that your Social Security benefit increases every year between age 62 and 70 that you delay filing. In essence, if you leave your Social Security benefits in the government’s hands instead of investing them yourself, you are guaranteed an 8% annual return on that part of your retirement portfolio. This doesn’t include cost-of-living increases.
Taking early benefits and investing them is only a good idea of you are sure you can get more than an 8% return. Any investment likely to produce a return higher than 8% would come with risks that are unacceptably high for a retirement-age portfolio.
There are only two real risks associated with letting your Social Security benefits accumulate until later than age 62. One is the possibility that Social Security won’t be there when you do retire. Given that the delay is only a few years and that Social Security is now the retirement plan of most Americans, this is extremely unlikely.
The second risk is that you won’t live long enough to collect an amount equal to what you would get if you started benefits early. Unless you are facing a terminal illness, however, chances are that waiting until at least full retirement age is still the wisest option.
If your health is good and you don’t need retirement cash immediately, you are far better off to delay filing. Even if you are facing circumstances that might make early retirement a necessity, it’s a good idea to look at all your options and try to find creative ways to put off filing as long as possible.
Once you reach age 62, Social Security is always an option. It gives you a doorway out of the working world any time you really need to take it. But for every year you can delay walking through that door, you gain 8%. That’s an investment return well worth waiting for.