If your retirement situation offers you the necessary flexibility, claiming early can be the right move.
The amount of Social Security income you’ll receive on a monthly basis depends not only on your income during your working years but also when you claim your benefits. The longer you wait, the more you’ll receive — up until age 70.
Your full retirement age or FRA (66 to 67, depending on your birth year) is when you can begin claiming your full Social Security benefits, but you can claim a fraction of your benefits as early as age 62. Just note, if you elect to begin claiming Social Security early, you’re locked into that reduced percentage of your full benefit.
Here’s how your monthly Social Security benefits are affected by the age you claim them:
- Age 62: You’ll receive a minimum of 70% of your FRA benefits.
- Age 66 to 67: You’ll receive your full benefits.
- Age 70: You’ll receive your maximum benefits, up to 132% of your FRA amount.
While in many cases it can make sense to delay claiming Social Security to maximize your cumulative benefit (the total amount of income you’ll receive over your lifetime from Social Security), it can also pay off to claim early.
There are plenty of situations where claiming your benefits at 62 makes practical sense, but there’s a less common scenario where claiming at 62 is virtually a no-brainer.
If you don’t need it, then invest it
If you don’t need your Social Security benefits to fund your lifestyle, because you have adequate income from other sources such as a pension, 401(k), Roth IRA, or rental properties, then you should consider claiming your benefits at 62 so you can put the money to work by investing in lower-risk assets such as broad-market index funds.
Though you’ll be collecting a smaller check each month by claiming early, you’ll also give your investments more time to compound.
Let’s use an example to illustrate this strategy. Assume at your FRA of 67, you qualify for a benefit of $2,500 per month. If you choose to claim at age 62, you’d give up 30% of your FRA benefit, leaving you with $1,750 per month. That $750 difference in your monthly benefit is significant, but electing to invest your Social Security in a low-cost index fund like the Vanguard 500 Index Fund ETF produces surprising results.
Here’s the breakdown assuming different average rates of return:
| Average Annual Return | If you claimed at 62 and invested 100% of your benefits, at age 85 you’d have … |
If you claimed at 67 and invested 100% of your benefits, at age 85 you’d have … |
|---|---|---|
|
4% |
$768,975 |
$769,362 |
|
5% |
$870,039 |
$843,971 |
|
6% |
$986,912 |
$927,169 |
|
7% |
$1,122,158 |
$1,019,970 |
CALCULATIONS BY AUTHOR VIA WWW.INVESTOR.GOV.
As you can see from the table above, as long as you achieve an average annual return greater than approximately 4%, you’ll be better off investing the lower monthly benefits at 62. So how feasible is it to attain that minimum 4%?
The average annual return of the S&P 500 dating back to 1957 is over 10%. Putting your Social Security checks in a low-cost S&P 500 ETF, the odds of seeing a rate of return greater than 4% over a 20-year span are quite high.
It’s also worth noting that if you were to wait until age 70 to collect the maximum monthly benefit of $3,100 before investing, you’d end up with the worst results of the three scenarios by age 85.
Only do it if you can afford to live without your benefits
This strategy obviously isn’t for everyone, but if you are fortunate enough to not depend on your Social Security income to live comfortably in retirement, claiming at 62 and investing your benefits could provide you with thousands in additional wealth for the later years of your life.
This extra money could allow you to spend more quality time with your friends and family, support your favorite charities, or leave a life-changing inheritance to your family.
As with all investing, this strategy comes with risk. You shouldn’t invest your Social Security benefits unless you truly do not need the extra income to cover your expenses and fund your desired lifestyle.
