According to research from the Senior Citizens League, 2/3 of seniors rely on Social Security for over half of the income that they receive. Since Social Security benefits are such an important income source for so many, it’s worth carefully considering when you should claim benefits.
You can start collecting Social Security retirement income when you are just 62 years old, but that is well below the full retirement age that you’ll need to reach in order to claim your standard (unreduced) benefit. Still, while a claim at 62 can shrink your standard benefit by as much as 30%, there are some reasons why someone may want to claim so young.
One Reddit user is currently thinking about starting his benefits at 62, with the goal of keeping his IRA money invested for longer. He is 53, and he believes that the compound growth from his IRA investments will make up for the penalties imposed because of the early Social Security claim. Since he thinks he won’t lose out because of that compound growth making up the difference, an early claim seems to make more sense to him to ensure he can collect as many benefits as possible in case he dies young.
So, is this a good plan that the original poster (OP) should follow through on?
Should you start collecting Social Security early to allow your investments to grow?
The Redditor’s theory seems to make sense at first glance. After all, an early Social Security claim results in a 6.7% reduction in benefits during each of the first three years once you add up the monthly penalties that apply. If you claim more than three years before your full retirement age, each of those additional years will result in a 5% benefits reduction.
While these are substantial penalties that make a real impact, it’s not unreasonable to expect that leaving more money invested and benefiting from the compound growth on those additional funds could more than make up for the Social Security benefits you are foregoing.
However, there is, of course, no guarantee that your investments are going to necessarily make money during the time period when you are relying on Social Security instead of drawing down your nest egg. In fact, there’s a very good chance you could end up caught in a market downturn. If you need to begin withdrawing money from your IRA at a bad time, you could lock in losses and end up in a much worse place financially. This risk of investing too much during the years immediately leading up to retirement is one reason why experts recommend you adjust your asset allocation as you age. You should have less of your portfolio exposed to equities as you get close to retirement.
The OP wants to give up a sure-thing — a guaranteed increase in Social Security benefits that are inflation-protected and that are guaranteed to last throughout his lifetime — in exchange for potentially making the same or more in an IRA where there are no promises of positive returns. This is a pretty big gamble to take with your retirement security.
A delayed claim gives you the best odds of maximizing lifetime income
The reality is, delaying your Social Security claim gives you the best chance of getting the most lifetime income from Social Security, as studies have shown that 7 in 10 retirees who wait until 70 end up collecting more total benefits than early filers. Delaying can also allow your spouse to get larger survivor benefits if you earned more money than your spouse and if you pass away first. So, even if you do die young, if you had a spouse who earned less than you, you’d still have been better off claiming early.
The OP should reconsider his plan, both because the odds are in his favor if he waits and because the risk is substantial that his investments won’t perform as he’s hoping while he is in his 60s. He may even want to talk with a financial advisor about optimizing his retirement planning to make sure he’s making the most infromed choices with the big picture in mind.
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