‘He is retired’: Should my husband take his Social Security at 62 and invest it?
Dear Quentin,
My husband is 61. I’m 57 and still working.
He is retired, and we are considering drawing his Social Security benefits when he turns 62 and investing that money so it can grow. His Social Security benefit would be $1,600 per month, since he stayed home with the kids while I worked.
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We have $1 million in equity in our home and owe $300,000 on it, with no other debt. I have a 401(k) with $1.7 million and a pension worth $1 million, or at least $4,000 per month if I choose the payment option. We also have Roth IRAs worth about $32,000.
Should we draw his Social Security now and put it into an investment account, or wait longer to receive a larger monthly benefit later? If I die, he would receive half of my Social Security benefit, right? That would be about $4,200 per month.
The Wife
Dear Wife,
Calculations are not so simple when dealing with real-world events.
First, let’s clarify your understanding of Social Security. Then we can move on to whether your husband should claim earlier or later. If you were to die, he would likely receive your entire Social Security benefit ($4,200 a month) as a survivor’s benefit. As a spousal benefit, he could receive up to half of your Social Security when you claim. However, if he started receiving Social Security before his full retirement age (FRA) of 67, he would receive a lesser amount.
His benefit at 62 would be reduced by 30% compared with the FRA. Assuming his Social Security benefit at age 62 is $1,600 a month, as you say, his FRA benefit at 67 would be close to $2,300 per month, and his benefit at 70 would increase to $2,800 per month (8% a year after FRA). If his investments were to return10% a year before inflation, claiming benefits early and investing the payments would be a tempting prospect.
A 10% and 7% market return
Let’s go with an aggressive scenario: If he begins taking Social Security at age 62 and invests the payments, he could accumulate more than $100,000 by 67, assuming a healthy 10% annual investment return. (Disclaimer: markets rarely run smoothly; some years could see a negative return, but this is a scenario based on S&P 500 SPX historical averages.) Not only would he have a nest egg, but he would still have his Social Security payments of $1,600 a month at 67.
While waiting until 67 would provide no accumulated investment, his monthly benefit would be 30% more. By then, however, it may be hard to beat those early invested withdrawals — not only would he be earning money on his $1,600-a-month Social Security payments, but he would also be earning returns on the interest he made on that principal. Again, we’re talking about a sequence-of-returns risk where those five years are not during a market downturn or recession.
Let’s look at a more moderate scenario: With a 7% annual investment return, his “take it early and invest it” strategy becomes less clear. In that scenario, investing the $1,600 benefit at 62 could reach $80,000, or more. He could end up with more money if he invests at 62, but that depends on how the market performs over those five years and his longevity. So it’s more a choice about risk tolerance than mathematics. (Lest we forget, Social Security faces funding issues in 2033.)
A breakeven point in your 80s
Typically, you have to live into your early 80s to break even if you take Social Security early. But this “take it early and invest it” strategy makes more sense because your Social Security is substantially higher and it would benefit your husband if you wait (if you die first). It would benefit both of you to wait (if you have long, hopefully healthy lives). But the biggest swing factor here is that you have substantial savings, so you are not reliant on these benefits for income.
Adding to your sense of security: Your investable assets will continue to grow. Currently, you have $1.7 million in a 401(k), $1 million in a pension and $32,000 in Roth IRAs, giving you $2.73 million for a nest egg. You don’t mention whether you have long-term-care insurance, but you do have $1 million in home equity, providing an additional cushion as you age. What’s more, you can, I presume, continue working until you are 65 and qualify for Medicare.
Your Social Security is the icing on the proverbial retirement cake.