Should you take social security early and invest it? This question can come up often when helping clients secure their financial future. However, the answer is a resounding no in most cases. Taking an early social security benefit only works to remove dollars from your client’s future assets, when the future assets are less certain.
Social Security benefits can supplement income, yet should not be considered the bread and butter. In general, we recommend delaying benefits for the optimal impact and finding other ways to supplement income. This includes working longer, finding more desirable or appropriate work, and other strategies.
The Pros and Cons of Taking Social Security Early
When working with a client who would like to take an early retirement income, you can share the following pros and cons of taking social security early. This can help answer the question: Should you take social security early and invest it?
Con: Reduced Benefits
If your client takes retirement income before full retirement age, they can lose up to 30% of their benefits, for as long as they receive Social Security. While this may not seem like much of a loss, it’s important to remember that SS isn’t really “free money,” which would make “whatever you can get” okay. Social Security is a return of money from a system you’ve paid into your whole working life.
While there are supposed strategies for making that money stretch farther, such as taking social security early and investing it, it’s not necessarily the optimal course of action. Most people choose to invest that money in stocks and bonds, expecting to make it big. Unfortunately, the average market returns are far from actual returns. And any losses realized at such pivotal moments, like being close to or “in” retirement, can have a significant effect.
During the “slow down” phase of life, certainty is more important. Is your client's income guaranteed? Is it reliable or expected? Do they have whole life insurance in place that gives them permission to spend down or use other assets confidently?
Con: Work Penalties
If your client wants to claim SS before their full retirement age and still wants to work, they can still be penalized. Social Security will actually deduct money from your client’s benefits until they reach FRA, further reducing the benefits of taking early Social Security. While that money becomes available at FRA, it’s less monthly income for the client to work with when drawing benefits.
If your client intends to keep working, that’s great! Encourage them to keep working, and focus on this as their source of income. If whole life insurance is in place, other assets can supplement income if that becomes important. Until then, leave SS alone, so that your client can have the largest possible impact from those dollars at a time when they may have more need of them.
Con: Smaller COLA
Another disadvantage that many clients don’t factor into the decision is the cost-of-living adjustment (COLA). These adjustments help to ensure that Social Security benefits keep up with inflation. For example, there is a 5.9% adjustment set for 2022.
Those who take early SS, and are therefore taking a reduced benefit, are getting less money. For example, a full SS benefit of $2,000 would get an additional $118 each month. Someone who gets a reduced benefit of $1,500 would only see an additional $88.50.
The COLA compounds, which means this gap will simply widen as time goes on. And as we know with life insurance, the compounding effect is powerful. The longer your client can delay their benefits, the greater the future income they can claim.
Pro: They Want the Money
While there are very few advantages to taking Social Security early, some people simply want the money. And sometimes, there can be a compelling reason to take the money early. For example, someone with worsening health may prefer to enjoy the money now, rather than not see the money at all. In other cases, a client may have other assets like life insurance to protect their legacy, and may simply desire more present income.
Sometimes, what is economically true (that delaying benefits can increase your wealth), may not align with the client's personal economy or peace of mind. If taking the early benefit is what they’re set on, and there’s no major concern they will run out of income, then that’s okay.
Should You Take Social Security Early and Invest It?
We would recommend against encouraging clients to take Social Security early in most cases, and certainly not to invest. As mentioned previously, Social Security has a greater benefit the longer you delay benefits. Besides this, the space most people wish to invest in is the stock market. Unfortunately, over such a short investing period (age 60 and on), there’s a greater chance of loss at such a critical time.
Instead, encourage your clients to think of Social Security like an annuity. They’ve paid into the annuity over their lifetime as an income earner. As a result, they get a guaranteed income after the typical retirement age. Delaying that money can increase their future income, and it’s also inflation-protected income. That alone is incredibly valuable.
If the client still has a desire to invest somewhere, there are other options that can provide cash flow, such as Real Estate or private lending. These types of investments require lump sums. If a client has a cash value life insurance policy, they can fund such an investment, keep their legacy intact, and create additional future income.
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