A financial expert says there's a strategy for claiming Social Security early that no one thinks about

retirement

  • Americans can begin claiming reduced Social
    Security
    benefits at age 62, whether they’re officially retired
    or not.
  • Most financial planners, however, recommend waiting until full
    retirement age between ages 66 and 67, or later, to take
    Social Security
    to get the full benefit.
  • In a new article published on
    The Motley Fool
    , financial expert Dan Caplinger says there’s
    another Social Security strategy that no one talks about: claiming
    the reduced benefit at 62 and investing the cash.
  • This strategy won’t work for everybody, but could be worthwhile
    for people who have enough savings to live onf or people who

    retire early
    .
  • Read
    more personal finance coverage.

Though Americans’ reliance on Social Security is
diminishing with each generation
, it’s still the main source of
income for most retirees today.

Conventionally we’re told to wait as long as possible to claim
Social
Security
. Each year you delay claiming benefits beyond your

full retirement age
— which is somewhere between ages 66 and
67, depending on when you were born — your benefit increases by
up to 8% annually, maxing out at age 70.

Research from
United Income
shows that that poverty among seniors could be
cut in half if every retiree claimed Social Security at the
“financially optimal time,” which is usually beyond their full
retirement age.

But in a new article published on
The Motley Fool
, financial expert Dan Caplinger says there’s a
counterintuitive Social Security strategy that no one talks about:
claiming the reduced benefit at 62 and investing the cash.

“In general, if you just look at total dollars paid after
adjusting for inflation, traditional breakeven analysis concludes
that living through your late 70s or early 80s is the typical time
at which delaying benefits starts to pay off,” he writes. “For
those who can invest their benefit checks, however, the time value
of money makes a huge difference, because investing early benefit
checks provides a longer time horizon for investment growth.”

The strategy works best for retirees with plenty of personal
savings

Caplinger ran the numbers for a person who claims their reduced
Social Security benefit at the earliest possible date, age 62. He
assumed the person’s full retirement age is 66 and a half, when the
benefit would be $1,400, and that they’re able to invest the income
because they don’t need it to live.

Caplinger found that when they put the Social Security money
into an ultra-conservative bank certificate
of deposit (CD)
yielding 2%, they would “break even” between
ages 81 and 84. Even though they’re getting less money up front,
the extra five years of compounding mean that the later Social
Security takers won’t catch up to the investor until their early
80s, even if they also invest their Social Security benefit once
they take it.

When Caplinger bumped up the investment return to 7% — the
average annual return in the stock market — there was a marked
difference. “Claiming early gives you a sustained lead, and
claiming later never catches up,” he said. The breakeven point in
this scenario, meaning the point at which the investor and the
later Social Security taker reach the same total lifetime payout,
investment returns included, is over age 100.

However, Caplinger notes, the stock market is fickle and
investment returns are often inconsistent year after year, so the
strategy isn’t foolproof. It won’t work for those retirees who do
rely on Social Security income, he writes, and may not be as
beneficial for people who are still working beyond age 62,
as Social
Security benefits are taxed
and further reduced relative to
your annual earnings. Those with a spouse or dependents who plan to
claim
survivor benefits
after death also have other considerations to
make.

But for people who have enough personal savings to sustain their
lifestyle — and expect to live many years in retirement —
claiming Social Security benefits early and investing could be a
smart way to grow their nest egg. Early retirees who aren’t
reporting earned income may benefit as well.

And it could one day be a good strategy for millennials, many of
whom are already
planning to retire on their own savings
. According to
a recent Wells Fargo survey
, only about 13% of millennials plan
to fund their retirement mostly with Social Security, compared to
21% of Gen Xers and 41% of non-retired baby boomers.

Read
the full article on The Motley Fool »


Join the conversation about this story »

NOW WATCH:
A 45-year-long study discovered trends in successful
hyper-intelligent children

Source: FS – All – Economy – News
A financial expert says there's a strategy for claiming Social Security early that no one thinks about