Should I Collect Social Security Early and Invest it?

when you go to collect social security you want to make sure you are selecting the option that will put the most amount of dollars in your pocket over the course of your lifetime but most people tend to overlook certain variables involved with that decision and when they do so they miss options that could potentially save them tens of thousands of dollars in extra benefits over their lifetime today we're going to look at what if you collect social security early and invest it as opposed to delaying and collecting a larger benefit hey everybody i'm james canal with root financial partners and i'm here to teach you what you need to know to create a secure retirement most people understand that the longer you delay your social security benefit the more you're going to get in your monthly benefit when you do decide to take it and what they look at is a very simple analysis if i take at this age versus if i take at that age what's the breakeven point essentially they want to know that based upon how long they live which option is going to put the most amount of money in their pocket well depending on what ages you're looking at you're usually looking at age 62 which is the earliest you can collect age 70 which is the latest you can collect in full retirement age which for most people is between age 66 and 67. now the simple analysis would say if you collect between 62 and 67 you're going to have a breakeven point at some point so to illustrate this if your full retirement benefit at age 67 is 3 000 per month you really have three main options you can collect early and take a reduced benefit which should be 2 100 per month you could collect at full retirement age so 67 in this example and you could collect your full 3 000 per month or you could wait all the way until 70 fully max out your delayed retirement credits and collect the benefit of 3 720 what people do from there is they start comparing the options and if you look at age 62 versus 67 what you'll find is there's a break even point at around age 78 meaning if we look at the numbers by collecting at 62 you are coming out ahead for the first several years 2100 per month that's 25 200 per year so if i have one person collecting at 62 and one person at 67 the person who starts at 62 right off the bat is gonna be coming out ahead the first year of collecting they're ahead by twenty five thousand two hundred dollars because they've collected their benefit the person who's delaying has collecting none by the end of two years they're ahead by full fifty thousand four hundred dollars which is just double the benefit if i take out the cost of living adjustment what they find is for the first five years they are ahead of the person who's delaying collecting until 67 by 126 000 in this example because they've been collecting their benefit for five full years while the person who's waiting until 67 hasn't collected anything but then what happens is a person who starts collecting at age 67 begins collecting a higher amount and over the next several years from age 67 until 78 they start chipping away at that difference so the person who collected at 62 was ahead by this amount and the person who collected at 67 was down here but each year that gap starts narrowing and there's a break even at 60 or age 78 meaning after that the person who waited until 67 tends to come out ahead because they have fewer years of more benefits which is more than the person who collected more years of lower benefits so that's the basic math around this now if you instead are collecting between 62 or 70 or deciding between 62 and 70 the person who waits until 70 there's a break even at age 81. so if you live past age 81 you'll be better off collecting at 70 if you won't live until 81 you'd be better off collecting at 62. now a lot of numbers there but that's the main way most people look at their social security decision and it is completely wrong in many cases here's what i mean by that if you're collecting at age 62 what you are doing is you're taking more income today but that income means there's less money you're taking out of your portfolio to support your life now in this example i'm assuming you're retired and you're living off your portfolio and off of social security and so the more you collect in social security the less you're pulling out of your portfolio the more your portfolio keeps growing so that opportunity cost is something that people miss when they're running their social security analysis now before we jump into this and how this changes things this is by no means a recommendation to start collecting social security early versus later versus your full retirement age i just want to explore what if instead of waiting until 67 which under traditional guidelines would tell you you come out ahead if you look at if you live until 78 or beyond what if you were to collect early and invest it which is kind of the same thing as collecting early and putting less pressure on your portfolio to have to supplement all of your income let's see what that looks like to do this we need to make some assumptions about life expectancy let's assume that you live until 90. and your choices are collecting social security at 62 or 67. well if you do the standard analysis and don't factor in what if you invested this money or what's the opportunity cost of taking this money early and letting your portfolio continue to grow if you were to collect at age 62 and your benefit was 2100 per month you would have collected a cumulative benefit of 731 000 over the course of your lifetime between age 70 or between age 62 and age 90. if you were to wait until age 67 instead you would have collected a cumulative benefit of 864 000 between age 67 and 90. so and the way people traditionally look at this analysis you came out ahead by a hundred and thirty three thousand dollars because that's how many more dollars you put into your pocket over the course of your lifetime now let's look at this to see what happens if you invest it how do those numbers change if you were to collect age 62 and invest those dollars let's assume that those dollars grow at six percent per year for you versus collecting a 67 and investing those dollars and those dollars grow at six percent per year for you well if that's the case then that changes the analysis and that changes the numbers by age 80 in this example if you were to collect to age 62 and invest the social security benefit you're bringing in and it grows at six percent per year by 80 you would have about 890 000 in that cumulative bucket by 80 if you had collected at 67 instead you would have about 787 thousand dollars in that bucket of social security that's invested in growing for you so what we see here is you're coming out ahead by over a hundred thousand dollars when you invest earlier when you collect early and invest versus delaying if we wait all the way until age 90 and see what that looks like well by age 90 if you had collected at 62 and invested your benefit growing at six percent per year you would have about one million nine hundred and sixty two thousand 000 in that portfolio if you set up a separate portfolio collected social security redirected it and then invested growing at six percent per year compare that to the person who collected age 67 collected a higher benefit but for a lower amount of years redirected that money into a separate portfolio they would have about one million nine hundred twenty three thousand dollars in their portfolio meaning the person who collected at age 62 came out ahead by about forty thousand dollars as opposed to coming out behind by a hundred and thirty three thousand dollars like they would have in that initial scenario when they just collect it and leave that money in cash and see what's the cumulative benefit that's earned over that time period now i'm assuming a growth rate of six percent the higher the growth rate here the more it starts to make sense to take your benefit early invest it as opposed to waiting to collect a higher benefit and then investing it at a later time if your growth rate is under six percent depending on how much lower it starts to get the benefit starts to go back in the favor of collecting later so the higher the rate of return you can get on your money the more it makes sense to collect early the lower the rate of return on your money the less it makes sense to collect early which just makes sense when you think about this from a common sense perspective the lower the rate of return the closer and closer the analysis begins to look just like that initial one of total cumulative benefits without factoring any growth rate versus the higher the return the more your money is working for you the earlier your money is working for you and the compounding growth is starting to make up for any differences between a lower benefit because you collected early now some considerations with this number one you look at this and you're probably saying well james this analysis makes sense if i collect my benefit and just invest it but i'm collecting social security not to invest i want to i want to live on it and yes and so what this analysis is it's almost like a proxy of assuming you retire at 62. if you don't collect social security you're going to have to pull more money out of your portfolio to meet your living expenses until social security kicks in so maybe you're not collecting early and investing it at six percent but if collecting early is allowing you to leave more money in your portfolio and continue growing at six percent per year that's the similarities between the analysis i fully recognize you're not actually pulling money and investing it or a lot of people aren't what you're really doing is pulling money and allowing your existing portfolio to remain invested and in doing that that's a similarity with this analysis so that's the first thing now second thing is this isn't necessarily an apples-to-apples consideration because if you look at social security there's tax implications for what your social security benefit is taxed at and they're going to be different than what your ira distribution is taxed at or what your roth ira distribution is taxed at or your brokerage account distribution so to do a full true comparison on this you want to know not just does it make more sense to take early and invest but what's the after tax net income amount to you for doing that versus the after tax net income amount for the alternative so i just want to make it clear that the tax implications cannot be compared apples to apples because social security is going to be treated differently than distributions from other account types that you may be living instead so those are the benefits of collecting early the earlier you collect it's either money you can invest for the future or it's less pressure on your existing portfolio meaning your existing portfolio can continue growing more and more in the future that being said there are benefits to delaying this isn't just a one-sided argument for collecting early some of the benefits of delaying is it's kind of like for savings you could say you're going to collect early and invest but i've seen a lot of people in the past they collect early and they don't invest it's just increasing their consumption it's increasing their spending and so they're locking in a lower benefit and don't really have much to show for it because they didn't turn around and actually invest that money like they did on paper and the analysis in real life things turned out to be a little different so by delaying in some ways it could potentially be like for savings where it is forcing you to have a higher income because you're just not accessing that money and don't have to make the decision of investing versus not investing another thing is you don't have to worry about the earnings limit so the earnings limit for social security is nineteen thousand five hundred and sixty dollars meaning if you are collecting early and you are working if you are earning more than the earnings limit social security starts to reduce your social security benefit by one dollar for every two dollars you earn over the earnings limit so if you're out making a hundred thousand dollars per year and you're collecting social security early your whole benefit isn't going to end up being withheld because your income is too high above the earnings limit now once you're at full retirement age or later that doesn't really come out the same way you're allowed to start earning income in still collecting social security but if you collect early and have a salary a lot of that benefit might be withheld now it ends up getting paid out to you anyways but you're still locking in a lower benefit the third thing that is more beneficial in delaying is social security is more tax advantage than other types of distributions as i mentioned before we can't do a pure apples-to-apples comparison here because the more you increase your social security benefit every extra dollar of social security income that's coming in is worth more than an extra dollar of ira distributions coming in because it's treated differently from a tax standpoint so you need to factor taxes into this analysis as well and social security is more tax advantageous as compared to other types of income the fourth benefit is it also eliminates the risk of market underperformance or behavioral mistakes so sequence of return risk is a big risk in retirement of if you retire and the markets go way down and it forces you to start pulling money from your portfolio as markets are down that's not a good recipe for success now if your social security benefit is higher those market downturns aren't as detrimental to you because you need less from your portfolio because more is coming from social security and as markets are dropping social security is staying consistent meaning you don't have to take as much out of your portfolio so it helps to protect against sequence return risk and also the behavioral risk of sometimes it's not the markets that are the challenge it's ourselves we are our own worst enemies and we make dumb decisions at the wrong time with our money in many cases and if we do that well social security would have been the better option because it's a given and it's going to be there regardless of what we're doing with our portfolio the fifth benefit of delaying social security has to do with considering your spouse so oftentimes in a relationship you have one spouse that likes finance and likes the money stuff and likes the planning and you have one spouse who would rather do anything else besides look at finances well maybe you're the spouse that enjoys the financial side and i'm guessing that because you're watching this video and you probably like the research and the podcast and the videos well what happens if something happened to you maybe with your strategy it works out better to delay or to collect social security or invest it because you know you can put that money to better work than social security increasing could well if you pre-deceased your spouse now your spouse may have a lower social security benefit do they know what needs to happen to continue managing the money well to continue making the most of those benefits that were collected early maybe or maybe not so one benefit of delaying social security is it's a higher benefit that your surviving spouse could continue to count on regardless of what's happening with the rest of your financial picture the sixth benefit is also consider your spouse this is always a two-person decision when you go to collect social security you have to factor in things like survivor benefits so do you do you want to make sure that your income is maximized and that your surviving spouse's benefit is maximized you want to look this as a two-person decision not just what do you do to maximize your benefit and then the seventh benefit of this of delaying social security is for many people just peace of mind it's nice to know that you have that paycheck that's coming in and yes you could create your own paycheck with an investment portfolio that's properly allocated but for some people that feels a lot different than having a paycheck from social security you don't need to think about it you know what day of the month that's coming in and it's just there and it's like a salary it's like a paycheck and there's just some peace of mind that comes with having that higher benefit as opposed to having to manufacture your own income benefit from an investment portfolio or anything else so pros and cons of collecting early can you do better if you collect social security and invest it yes there's many cases in which that could be true however there are still benefits to delaying your benefit to increasing your benefit and it comes down to having a strategy and understanding which potential option works best for you thanks for watching this is james canal with root financial partners if you found any value in this video please be sure to share with someone else who you think could also find value in this video if you've not already done so please make sure that you like this video please make sure that you subscribe to our channel for more content just like this and if you want other tips and strategies for how you can create a secure retirement be sure to check out our podcast called ready for retirement and finally if you're interested to see how our services help clients to create their secure retirement be sure to check us out online at root financialpartners.com [Music] you

Channel: Root Financial Partners

Views: 1,405

Keywords: investing, retirement planning, tax planning, financial planning, retirement, personalfinance, taxes, financial planning at 50, how do I retire?, long-term investing, financial planning at 60, roth conversions, roth ira, IRA, pros and cons of investing, financial education, social security, social security benefits, how to retire, how much do i need to retire, retirement planning at 50, retirement planning at 60, how to retire early, retirement portfolio

Id: 9nZi147unB4

Length: 16min 45sec (1005 seconds)

Published: Sat Dec 18 2021