Start Social Security Early and Invest? Ask the Actuary

Last Updated May 27, 2011 4:57 PM EDT

Is it a good idea to start Social Security benefits at age 62, even if you don't need the money to meet your living expenses, and then invest this income? Several readers asked that question in response to my prior post, Boost Your Social Security by $100,000, which suggested that you delay Social Security in order to maximize your lifetime payout.

It's a good question. The answer depends on three important factors:
  • The rate of return you achieve on the invested income
  • What you'll eventually do with the Social Security benefits you invest
  • How long you'll live
Before we do the math, let me emphasize that you must be realistic with yourself if you're considering this option: Do you have the discipline to actually invest the Social Security income? Too often, I've seen financial advisors advocate the "start early and invest" strategy, but then people end up spending the money before they have a chance to invest it. One thing you should not worry about: whether Social Security will be there when you retire. It will.

With that warning out of the way, let's do the math. For the purpose of this post, let's suppose you start benefits at age 62, with the intention of investing the income until age 70. At that time, you'll start drawing from the Social Security benefits you've invested, as well as begin using your current Social Security income to meet your living expenses.

Does the "start early and invest" strategy result in more income than if you had simply waited until age 70 to start your Social Security benefits? The answer is yes if you don't live to at least average life expectancies, and/or if you achieve good rates of return. The answer is no if you live to average life expectancies or beyond and/or you achieve modest rates of return.

Let's use the example from my previous post for the purposes of this post: Two people, Joe and Mary, were both born in 1950, both had an identical earnings history, both are currently earning $75,000 per year, and both earned about $75,000 in prior years, adjusted for wage inflation. Joe and Mary have each earned a Social Security benefit starting at age 66, their FRA, of $2,000 per month. Joe plans to start his Social Security benefits at age 62 and will receive $1,500 per month. Mary plans to start her Social Security income at age 70, at which time she'll earn $2,640 per month due to Social Security's delayed retirement credit. Both Joe and Mary's benefits will be increased for cost-of-living adjustments after age 62; for the purpose of this analysis, I assumed COLAs of 3 percent per year.

So I added up Joe's Social Security income of $1,500 per month from age 62 to 70, increased for the assumed COLA each year, then figured out how much investment income he would earn at various rates of return until age 70. At that time, I assumed Joe would draw enough money from his accumulated assets so that when he adds this draw to his Social Security income, he has as much income as Mary. I assumed that Joe's remaining invested Social Security benefits continued to earn investment income after he started drawing on these investments.

How long will Joe's invested Social Security assets last? It's important to determine that because when these assets are depleted, Joe's total income will come from just his Social Security income, so he only comes out ahead if he dies before a "breakeven" age to make the "start early and invest" method a good move. The answer depends on his rate of return, as summarized below:


Do these results indicate that "start early and invest" is a good move? Clint Eastwood's character, Dirty Harry, offers the best answer: "Do ya feel lucky?"

In today's environment, you need to take risks in the stock market or interest rates to hope to earn rates of return of five percent or more. Maybe you'll earn five percent or more -- and maybe you won't. And while you might earn 8 percent, keep in mind that you'll have to take substantial risk to do so. Mary's "return" for waiting until age 70 was risk-free.

The average age at death for a man who is now 62 years old ranges from 82 to 83; the range is 85 to 86 for a 62-year-old woman. You can easily add five to seven years to your life expectancy if you take care of your health, are more affluent than average, and have an above-average education; this describes the types of people who might follow the "start early and invest" strategy. So there's a good chance you'll live beyond the ages shown above.

Instead, suppose you take your accumulated Social Security benefits at age 70 and you buy an inflation-adjusted annuity. After all, that's the type of lifetime guaranteed income that Social Security provides. If you're a man, you'd need to earn an annual rate of return on your invested Social Security benefits of over 13 percent per year between ages 62 and 70. The necessary rate of return is even higher for a woman or married couple. In this case, you'd really have to be lucky!

How do the results change for COLAs other than 3 percent? A lower COLA helps the "start early and invest" strategy, while a higher COLA hurts it.

For most people, Social Security is the foundation of their retirement security. You don't want to take chances with it. So "start early and invest" just doesn't make sense to me. If you like to take risks to boost your retirement income, then do that with your IRAs, 401(k)s, and other retirement savings.

The above analysis didn't consider income taxes, but that probably won't change the basic conclusion. I also didn't consider the effect of spousal benefits -- adding that complication might need a rocket scientist to help us figure the results. Finally, the conclusions should be roughly the same for different amounts of Social Security income, or for people of different ages than Joe and Mary.

I checked my logic and math with my Social Security expert, Andy Landis, author of Social Security: The Inside Story, who agreed with my analysis.

There's one more thing to consider: What if you never need Social Security income -- because you have other sources of funds you plan to use during your retirement -- and you "start early and invest" so you can leave an inheritance? Stay tuned for a future post that analyzes this exact scenario.

Whew! While there are a lot of details to consider, it's well worth putting in your time to figure how to maximize your Social Security payout. You'll thank yourself when you're drawing the maximum benefit in your80s and 90s!

Image from iStockphoto contributor jhorrocks
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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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