Ask Rusty: File Early and Invest vs Wait to File

by AMAC Certified Social Security Advisor Russell Gloor, Association of Mature American Citizens        

Dear Rusty: I read your article entitled “Doing a Breakdown Analysis” and noted that the article was in response to a reader question about when to take Social Security Benefits.  The writer commented “I’m in pretty good health and don’t really need the money right now.” The breakeven analysis you suggested is a great help in determining whether to claim early or wait to take Social Security benefits; however, and in light of your reader’s comment that “he did not need the money right now,” perhaps another element should be added to the breakeven analysis.  That element is to roll the figures based on taking the money early and investing that money month after month for the 48 months in question.  The end result should also help in determining an appropriate course of action.  I was in the same position back in the mid 90’s and made out far better by taking the money early and investing it.  In any event, it’s one more way to look at this issue.  Signed: Faithful Reader

Dear Faithful: Thanks for your feedback.  I certainly agree that there’s more than one way to look at the question of when to take Social Security.  And, yes, I’m quite familiar with the strategy of taking benefits early and investing them.  But since I’m not a Financial Advisor and not qualified to give investment advice, I’m required to restrict my remarks to only the Social Security aspects relating to questions I’m asked.  You might be interested to know, however, that many financial advisors today do not recommend taking Social Security benefits early, investing the money, and trying to earn more than the Social Security benefit growth they’ll realize by waiting.  Unlike the investment opportunities of the 90’s, it’s pretty hard these days to beat the 6.7% annual growth in one’s Social Security benefit realized by waiting until full retirement age (FRA) to collect, as well as the 8% annual growth one realizes by waiting beyond full retirement age.  And those higher benefits are paid for life, which is significant when considering that average life expectancy is now well into the 80’s and living into the 90’s is now relatively common.  Another consideration when taking benefits earlier than one’s full retirement age is that there is an annual earnings limit which, if exceeded, will result in Social Security withholding benefits, so a person’s intentions for continuing to work could have a financial impact and should be included as part of any financial analysis.  And yet another is that Social Security benefits are taxable if certain income thresholds are exceeded, so taking benefits early when someone is still earning a large salary will increase their income tax liability.  The point is, it’s never an easy or clear-cut decision as to when to start Social Security, and many factors such as those mentioned above need to be evaluated.  And the breakeven analysis, which compares cumulative benefits at different claim-ages, should only be one piece of the puzzle.

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