Ask Rusty: Should I claim benefits early and invest them?

Dear Rusty: I am 64 years old and my wife is 62. We both have good paying careers. Our original plan was to wait until we each turned 70 before drawing our Social Security benefits. 

But I was talking to a friend who is a very successful small business owner who told me that he started drawing his SS benefits at age 62. 

He puts the funds in a mutual fund every month. He has “run the numbers “ and he is convinced that he will come out ahead rather than waiting to draw at age 70. I was shocked to hear this advice since I had never heard any expert advocate this option before. What say you, Sir? Signed: Questioning My Plan 

Dear Questioning: I, too, have “run the numbers” many times. Although Social Security will say that it makes no difference when you apply (they say you get the same in total benefits no matter which age you claim) with average longevity today being in the mid-80’s (84 for men; 87 for women) that may not be true. I have done numerous “break even analyses” and have found that if one claims at their full retirement age instead of at age 62, they will have collected the same amount of benefits at age 78 in either case. 

That means that by living longer than age 78, you will realize more in total cumulative lifetime Social Security benefits by waiting until your full retirement age to apply. 

Similarly, if you wait until age 70 to claim, you will break even (collect the same in total benefits) at age 82, and if you live beyond 82 you’ll get more in cumulative benefits by waiting. If you live well beyond those ages, the extra benefits can be very substantial. 

I wonder if your friend included in his analysis how the “earnings test” affected his early benefits. If you are still working and you claim benefits before you reach your full retirement age, you’ll be subject to Social Security’s “earnings limit” ($17,640 for 2019) which, if you exceed it, will cause Social Security to withhold benefits equal to $1 for every $2 you are over the limit. 

This applies to both you and your wife. The earnings limit doesn’t go away until your reach your full retirement age, so when contemplating whether to collect benefits before your full retirement age you should assess the amount of benefit loss you will incur if your earnings exceed the earnings limit. 

Although at your full retirement age (FRA) Social Security gives you time credit for any months you don’t received benefits because you exceeded the earnings limit, it will take you years to recover any withheld benefits because they only slightly increase your benefit at your FRA to compensate for withheld benefits from over-earning (you need to live long enough to recover those lost benefits). 

And did your friend consider this: your surviving spouse will receive 100% of the benefit you are receiving at your death. If you claim before your full retirement age, your surviving spouse will get the reduced amount; if you wait until after your full retirement age to claim, your surviving spouse will get the full amount of your benefit increased by delayed retirement credits. Benefits are about 76% more at age 70 than they are at age 62. 

Of course, the question of when to apply must always take into account your current financial needs, your current health and lifestyle, and your expected longevity (considering your family history). Whether to claim early and invest those benefits or wait until later is a choice only you can make. 

But you should consider the above points and compare the guarantee of increasing your lifetime benefit amount by 6% to 8% for each year you wait to claim, against the interest or growth rate you might expect from investing in the securities market.

This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation’s staff, trained and accredited by the National Social Security Association (NSSA). NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity. To submit a question, visit our website or email us.