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Business // Thinking Smart
David S. Chang

Investing Social Security Benefits

Should you take Social Security earlier, instead of later, and invest it in hope that you will have more in retirement? I am asked this question frequently. Based on today’s interest rates and market conditions, it is probably not a good idea.

Your Social Security benefits will vary based on when you start taking them. If you take them before your full retirement age (visit artofthinkingsmart.com to find out your full retirement age), you will get less per month for the rest of your life. If you wait until after, you will receive an increase for each year you wait. This increase is approximately 8 percent a year until you hit the age of 70.

Social Security Administration based this rate on a life expectancy of 84. So no matter what age between 62 and 70 someone starts taking their benefits, if he lives to 84, he will have received the same overall amount of benefits no matter what age he took it.

This calculation also is based on a real, risk-free interest rate of 3 percent per year. However, since interest rates are so low, and if you take into account investment expenses, it is close to 0 percent! If you decided to take Social Security at 62 and invest it, you would have to virtually invest it in all stocks in order to beat the 8 percent per year that Social Security would give you. If you decided to buy an annuity instead, you would have to wait some time in order to accumulate enough to be reach the same increase – time that a retiree may not have.

The stock market the past 80 years has averaged about 10 percent. However, if you had invested in early 1987, 2000 or 2008, your investment would have gone down significantly, with little time to recover. Putting 100 percent into equities over the long haul is one of the few ways to get the 8 percent, but it is very aggressive for someone in retirement unless they have a significant amount of assets elsewhere.

In addition, if you decided to invest your Social Security early and live off your other investments, you would have to deplete them while investing your benefits. This can have potential extra tax liabilities if it is coming from a retirement account. You could also miss out on tax-deferred growth that you can continue to take advantage of in a qualified account.

The government giving you 8 percent a year is hard to beat, and if Social Security will be one of your primary sources of income and you can wait to start taking benefits, it may be best to hold off on investing them.

However, based on your personal circumstances, income sources, tax situation and investment experience, it potentially could make sense if you are able to take the risk for a higher return. The country is also in heavy debt, so some may feel comfortable taking it now.

david@artofthinkingsmart.com

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