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Social Security: The Issues with Taking Benefits Early and Investing Them

Q: I'm 14 years younger than my husband and the sole wage earner. Our effective tax rate is 15 percent, I believe. My husband fears major changes to Social Security and wants to collect his retirement benefit early, starting now. I know that his SS income will be taxed because of my income. Is there any benefit or pitfall to taking his early benefit and putting it in an IRA? My feeling is that to "bank" that money in balanced investments could be a substitute for long-term care insurance that we cannot afford, and could protect him from "losing" his benefits.
A: I asked my co-author Tiya Lim for her take on this, as she wrote the Social Security section for our book The Only Guide You'll Ever Need for the Right Financial Plan. Here's her response.

First of all, it's great that you're thinking ahead and planning for the future. You're already better off than most. Planning for medical expenses and late-life expenses is something everyone should consider.

As for when to take Social Security, a lot of that depends on what you and your husband's estimated benefits would be. Without knowing those numbers, it's difficult to provide specific advice. What I can say is that "banking" your benefits for the future might not be the best strategy.

First, your husband's concern that SS benefits will be lost due to future changes shouldn't affect your husband's benefits. Most of the proposed legislation will only affect those who are about 25 years away from collecting retirement. The most talked about changes include:

  • Increasing the full retirement age (currently 66 and 67) to possibly 70 for future generations
  • Increasing the maximum income level subject to SS taxes (for 2011, that level is $106,800)
  • Increasing the Social Security tax rate, currently 4.2 percent
  • Adjusting the cost of living adjustments (COLAs)
Each of these changes wouldn't affect your husband's benefits, regardless of when he claims benefits.

Typically we recommend that our clients delay filing for benefits if they can afford it. In your case, where you will continue to work and will just "bank" the benefits, it seems as if you may be able to afford the delay. Another way to look at delaying is if your husband is 63 this year, for each year he waits to collect his benefit, he will get an increase in his benefit.

For example, if your husband's full retirement benefit (at age 66) is $1,000, he would receive about $800 per month if he chose to claim now at 63. By waiting a year, his benefit would increase to $867 per month. If you consider the time value of money, it's like earning more than 6 percent on a one-year investment. So putting money aside in an IRA, you would have to beat a 6 percent return to make it worthwhile. And for each year after 66 that he delays filing, he gets an 8 percent increase per year.

Because you're 14 years younger than your husband, it's highly likely you'll outlive him. For that reason, he should plan his Social Security claiming strategy around your life expectancy as well, since you may be receiving a survivor's benefit.

If you have a question you would like to have answered, please submit it using this blog's contact form. Please note that Larry will try to get a response back to you, even if your question doesn't appear on the blog.
For further reading on Social Security, see the following posts:

Three ways I can help you become a wiser investor:
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