One of the "ideas" I here every so often is to take Social Security at age 62 and invest it. I'm told that the investment will grow and be more valuable than waiting until age 70 and drawing the increased Social Security benefit. I've never heard anyone talk about the analysis they did to get to that decision. So, I decided to do it. Just to see how it works out.
I set up a basic excel spreadsheet to run the calculations using average returns. I made the following inputs (taxes were ignored):
- Inflation/Social Security COLA = 2.5%
- Age 62 Benefit = $17,757
- Age 70 Benefit (adjusted for inflation) = $38,196
My first calculation was to figure out the balance of the portfolio at age 70 assuming the entire Social Security benefit was invested. I ran 3 different rates of return.
- At 5% (inflation plus 2.5%) the portfolio was worth $193,199
- At 6% (inflation plus 3.5%) the portfolio was worth $201,908
- At 7% (inflation plus 4.5%) the portfolio was worth $208,069
I'll leave it to you to decide which return (and associated risk) is appropriate for you in retirement.
The difference between the two Social Security payment amounts started at $16,561 at age 70 and increased each year. So, how long did the money last, if you take money out of your portfolio to make up the difference?
- If the portfolio continues to earn 5%, the portfolio is exhausted at age 82
- If the portfolio continues to earn 6%, the portfolio is exhausted at age 84
- If the portfolio continues to earn 7%, the portfolio is exhausted at age 86
What to make of the above? Well, if you decide to take Social Security at age 62, be ready to be "below average".
- The average life expectancy for a male in his 60s is 88, so in all the scenarios above, the money runs out by average life expectancy
- The average life expectancy for a female in the same cohort is 90. Again, the money is exhausted prior to average life expectancy
Also remember that if you're married, the reduced income will affect a surviving spouse as well and there is a 50% probability that at least one spouse will live to age 93.
My conclusion? Using average rates of return, taking Social Security early, and investing it is not a viable strategy.
Since I'm a bit of a geek, I decided to do one Monte Carlo analysis to account for variations in returns. I set the portfolio value at age 70 at the mid value above ($201,908) and set up the portfolio during distribution at 60/40 Stocks/Bonds mix. The results were about the same. There is a 76% chance that the investment assets will be exhausted by age 88. In the worst-case scenario, the funds are gone by age 80. So, like above, as long as you and your spouse (if married) are willing to be below average, take Social Security at age 62.
In my mind, the risk when talking about Social Security is not whether you'll get your money back, but whether you'll have sufficient income available if you beat the odds and live a long, long time. Try to think of it that way.
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