Hidden Bonus: Taking Early Social Security Payments

retirement_roadMy Comments: I’ve said it before and I’m sure I’ll say it again: when to claim Social Security benefits is a complex question. On one hand, if you know you will live to life expectancy, it’s a fairly simple math question. But on the other hand, if you don’t know when you will die, or when your spouse will die, it’s another matter.

Added to this uncertainty is the differential in your respective ages, how much other money you have that you can draw upon until the optimal date, your respective work histories, which determine, along with your age, how many actual spendable dollars you will get. And on and on.

This is another look at this issue.

By John Wasik,  July 11, 2014

Suppose you didn’t need to live off of Social Security, and took the “early” payments at 62?

You may do better using this strategy in terms of total lifetime payments rather than waiting until your “normal” retirement age (depends upon when you were born) or age 70 — when Social Security pays you the largest-possible payment.

The “early saver” strategy works best, of course, if you can get a decent return on your money — you don’t lose principal — and have other sources of income to support your lifestyle. It may even trump waiting until age 70, when Social Security will pay you their highest-possible benefit.

Hannah Alexander, who teaches at the University of Missouri, sent me some compelling numbers on how this strategy could work:

“The assumptions are that the person does not work (or else would not be allowed to collect Social Security), and that this person does not need the money right away, and can wait for it to grow. I agree that this person will get more money per month by waiting, but not enough to make up for the loss of not being paid for the 8 years between 62 and 70. Over a lifetime this person will make less money by waiting. And if that person indeed does not need the money, and can put it in corporate bonds at 4%, she will make even that much more over a lifetime.”
SSA 2009-2083Future payouts of Social Security Benefits in the US from 2009-2083. Source: Social Security Administration. (Photo credit: Wikipedia)

How much more? This is what Prof. Alexander figures:

“I’m using your supposed life expectancy of 85 (as the average between men and women) and your monthly payment ($1,000 for 62, and $1,320 for 70). Starting at 62 will translate to an extra $38,000. Even in a 20% tax bracket the numbers favor an early start with $30,000 extra. ”

In order for this strategy to make the most sense, the additional returns need to be compounding until age 94 for the additional savings to exceed the amount you’d receive by waiting until 70 for the higher benefit.

“Even if the person does not invest the money, or even if he/she spends it right away, and does not save a dime, this person will still be better off taking it early, because over a life time she will make more money just from the Social Security checks alone,” Dr. Alexander adds.

There’s also a huge wild card on how you invest your Social Security payments (if you choose to do so): If you take a lot of risk, it could blow up. For example, if you put all of the money in Treasury bonds, you could lose money if inflation or interest rates rise. Stocks also have their own risks.

You also have to keep in mind that many people have little or no skill investing long term, so they may fall prey to an undiversified, unhedged strategy that could diminish their Social Security nest egg. It also gets complicated with a spouse because then you are examining the value of spousal and survivor benefits.

But it’s possible to make it work if 1) you find a risk-adjusted strategy that works over time and 2) you stick to the plan through various market turns. Discipline is essential in retirement investing. If you don’t have it, hire a certified financial planner to run the numbers and keep you on track. You can also experiment with Social Security’s many online calculators. http://www.ssa.gov/oact/anypia/anypia.html

John F. Wasik is the author of 13 books, including Keynes’s Way to Wealth: Timeless Investment Lessons from the Great Economist. He contributes to Reuters, The New York Times and Morningstar.com and speaks around the country.