Claim Social Security at 62 and Invest the Money--Good or Bad Idea?

hey everybody welcome back to the financial freedom show my name is rob berger this is another q a edition and the question i'm going to tackle is one i've received from a number of viewers in the last couple of weeks and it's this uh shouldn't we claim social security at the earliest age 62 if we don't need the money and we can say and we can save and invest it by investing that money doesn't it make sense to claim at 62 even though we're giving up higher monthly payouts if we were to wait so that's the question we're going to tackle today and we're going to look at it from two different perspectives the first is just the numbers and i'm going to give you a hypothetical which one makes the most sense and then though an issue that often gets overlooked we have to at least consider the tax implications of our decision so that's what we're going to do today let's jump right in and the first thing i did was just use this uh social security benefits estimator i'll leave a link to it below the video this is from the social security administration and we're going to use these numbers right here and i can make that maybe a little bigger for you so we're going to assume at 62 you get 1146. if you waited until full retirement in this case 67 you'd get 1748 and then if you waited uh all the way to 70 you'd get 20 252 so those are the numbers we're going to use what i did was just create a really simple calculator you can create this on your own i think very easily i've got the the the ages here and then you can see the formula and it's just a fair value formula f1 refers to this 8 percent you see over here and f2 refers to the 10 years i'll explain that in a minute and i divide by 12 here and multiply uh by 12 there just to get a monthly compounding and then in this one you'll see that 1146 number that just comes from here of course you'd want to put your own information in to get the numbers that apply to you and then if we oops here we go if we go to this one you can see i've got the 1748 number and i've also subtracted five years from whatever number we put in here because we're obviously starting five years later uh if we wait until 67 and then here again i've got the larger monthly benefit right there and here i've subtracted eight years because we have to wait eight years to get that higher benefit and of course if i put 10 years in here you know obviously the 62 wins out quite easily because we would have only had five years if we waited till 67 for our money to grow and of course if we waited till 70 we'd have only had two years so the question then becomes well do these eventually catch up and pass uh the person who claims at 62. and so we can put different numbers in here we can assume maybe we live to be in this case 77 right so 15 years from 62. and you can see they're catching up but they're still behind claiming at 62. so what about 20 and still catching up but still behind well 25. now we're getting we're getting up there still close but still behind so now at 30 let's think about this we're 92 years old and they still haven't caught up and we could even go let's go to 40. and well it looks like 67 has finally got up if you wait till 70 you're still just a few dollars behind but of course at this point you know we're quite old and probably unlikely to live that long so let's put it back down let's assume 25 years or actually we'll assume 30. so that's sort of your traditional retirement and again making that assumption claiming that 62 wins out but we've been assuming 8 percent that may or may not be a reasonable assumption what if we didn't earn that return what if we earned seven percent well immediately the numbers change and 67 and 70 both beat out 62 although as you see 70 doesn't quite beat out 67 i imagine if we add a couple years there we go at 32 it it goes over and so my takeaway and i've actually found some more articles that sort of confirm this but my takeaway is if we assume you earn an 8 percent return on average uh then yeah probably claiming that 62 just looking at the numbers is is probably a pretty reasonable uh strategy but of course earning eight percent is a big big assumption and if your returns go below that then eventually claiming at 67 and even waiting till 70 catches up so you know you can decide for yourself what assumptions you think are reasonable and what you think your investments would do for you but it's the taxes that i want to focus on now because i i think that's really the bigger issue if you don't need to live off of the social security so that you can just invest it that raises a big question how are you funding your retirement and more specifically are you funding it in ways that it's that will trigger taxes for example are you pulling money out of a taxable account where you'll realize some capital gains or are you taking money out of traditional retirement accounts like an ira all of which will be treated as ordinary income that's the real issue that i think i would certainly consider if i were faced with this decision and it turns out to be a fairly complicated issue so i'm going to give you my thoughts on it but understand i'm not a tax professional and frankly if and when i get to the social security age and no i'm not there yet thank you very much i'll probably reach out to our tax accountant to crunch the numbers it gets mind-numbingly complex but with those caveats let's get started the first thing we want to point out uh is that social security and this is just an article from turbo tax i'll leave a link to it below the video but social security depending on how much you make could be taxable right and so if in addition to the social security you receive you're generating other taxable income for example from withdrawing from a traditional ira you need to evaluate the tax implications of that choice so for example instead of withdrawing from the traditional ira or for that matter a taxable account and triggering those taxes which in turn can then increase potentially the taxes you pay on your social security benefits you might be better off just spending those social security benefits rather than investing them and that in turn could influence when you should start uh claiming social security benefits but it actually gets far more complicated than that and i want to show you a few other things this is uh irma this is the additional premiums you might pay on medicare depending on uh how much you make and you can see the table here again i'll leave a link to this below the video but this is where things get a little complicated because a lot of these uh tax issues turn on what's called modified adjusted gross income and that modified adjusted gross income is tricky for at least two reasons first it doesn't show up anywhere on our tax return there is no magi modified adjusted gross income line on our tax return there is an adjusted gross income and that's what you start with but then you have to make changes or typically additions to that number to arrive at your modified adjusted gross income and what makes that even more complicated is that there's not just one modified adjusted gross income there's quite a number of them there's one to determine whether an ira contribution is deductible there's one to determine whether you qualify for affordable care act credits and there's one as we just saw to determine whether the irma the additional premiums to medicare will kick in and they get complicated i will show you this for um for irma which is what we're looking at here the way you determine modified adjusted gross income is you start with your agi right and then you add any tax-exempt interest well that doesn't seem too complicated one of the things not listed there is any part of your social security benefits that weren't subject to tax which probably has you asking well rob are there other modified adjusted gross incomes calculations that do factor in any portion of our social security that's not taxed well yes there are in fact we can look at this this is for the aca credits and we can see here you start with your agi and i'll try to enlarge that for you and you add in any untaxed foreign income and any non-taxable social security benefits so what does all of that mean well it means for irma if you're investing your social security benefits and that's causing you to incur additional taxes say for pulling out traditional iras for example not only could that increase the tax you pay on your social security benefits up to 85 percent of those benefits in theory depending on where your income falls it could increase uh your irma premiums and depending on before you get to medicare in theory uh it could also either eliminate or reduce your affordable care act credits now if that weren't enough to boggle your mind and it boggles mine i got to tell you there's at least another consideration roth conversions if you're planning to do roth conversions one of the strategies is to keep your your taxable income as low as possible because as we know uh assuming you're you're converting sort of traditional pre-tax iras over to to a roth that's going to incur taxes and so you want to keep the rest of your taxable liability as low as possible well if receiving social security but then pulling money from a traditional ira or taxable accounts increases your tax liability it can make a roth conversion less desirable so as you can see the whole question it may seem simple and just about numbers and how much we could earn on our investments over time that's certainly part of the equation but we've got to think about the tax implications of these uh choices and they can affect other aspects of our tax returns in ways that at least speaking for myself i wouldn't always understand or fully be able to predict that's why if you're going to take one of these strategies i highly recommend you talk to a tax professional it could affect a number of different areas of your taxes so there you go that's my short answer to what turns out to be a fairly complicated question if you have questions or comments leave them below the videos i'll do my best to help you out any way i can and until next time remember the best thing money could buy well maybe a simpler tax code but that ain't going to happen so financial freedom

Channel: Rob Berger

Views: 46,413

Keywords: social security, social security at 62, social security benefits, social security retirement, filing for social security, social security retirement benefits, social security benefits at 62, social security benefits at age 62, investing social security benefits

Id: cJw5X2s_czg

Length: 11min 7sec (667 seconds)

Published: Fri Feb 11 2022