Does It Make Sense to File Early for Social Security and Invest in the Market?

As I’ve been working in earnest on retirement planning over the past several decades, I’ve realized a couple of key things. One is that retirement planning isn’t a math problem to solve. Nearly all of the major decisions we make about whether, when, and how to retire have both financial and nonfinancial dimensions, and it’s important to explore both aspects.

The other is that I don’t need to have all the answers. (Phew!) For every single aspect of retirement planning, there’s someone—and usually more than just one person—whose knowledge of that topic is nothing short of encyclopedic. Someone who wants to help others for the greater good.

Bringing both things together was the impetus for my new book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement. In this exclusive excerpt from the book, I chat with Social Security expert Mary Beth Franklin about whether it makes sense to claim Social Security early and invest the proceeds. In the book, Mary Beth and I also discussed claiming strategies for never-married people, married couples with different ages and/or earnings histories, married couples with similar ages and/or earnings histories, divorced people, and widows/widowers.

Christine Benz: One thing I sometimes hear from avid investors is that they can outearn the increased payout from delaying Social Security if they make an early Social Security claim and then invest those funds in the market. What do you say to that?

Mary Beth Franklin: They might, depending on the year. You might get a 30% return, or you might lose 30%. It’s only fair to compare the concept of delaying Social Security to investing in a risk-free investment like a CD [certificate of deposit] or a bank account. Over the past 10 years, you were getting 0% on that bank account, and the government’s offering you 8% a year for delaying. Now, interest rates are creeping up; as we’re having this conversation, you could get a CD for 4.5% or even 5.0%. Given that, some people might be more comfortable taking Social Security and putting the money in a CD for 5%. Yes, it’s less than the 8% you pick up by delaying. But you’ve got that bird in hand.

Putting the money in the stock market, on the other hand, is very iffy. If you’re feeling lucky, that’s great. You might really increase your returns, but you have to be prepared to lose it as well. For many Americans, particularly those who don’t have pensions, this is the only source of lifetime income they have, and it’s cost-of-living adjusted.

Even if you’re buying an annuity, in most cases that is not cost-of-living adjusted. There’s a whole lot to be said for guaranteed, cost-of-living adjusted income for the rest of your life, no matter how long you live.

Benz: Can you talk about how the cost-of-living adjustment from Social Security works?

Franklin: Ever since 1975, Social Security benefits have been automatically adjusted for inflation each year based on increases in the Consumer Price Index. In a few years when there was no measurable inflation, there was no cost-of-living adjustment [COLA].

Social Security beneficiaries got a whopping 8.7% COLA in 2023, the biggest in more than 40 years, followed by a more modest 3.2% increase in 2024. Even if you have not yet claimed Social Security, any annual COLAs from the time you turned 62 until you claim Social Security are automatically baked into your future benefits.

Benz: I want to talk about this concept of breakeven analysis, which I know some people use when they’re thinking about when to file for Social Security. Can you talk about what that means?

Franklin: Breakeven analysis basically asks, “How long do I have to live to make the decision to delay benefits worthwhile?” Once you reach the breakeven age, any benefits you receive after that point will result in larger total benefits over your lifetime.

For example, you could choose to collect permanently reduced benefits at age 62 or larger benefits if you wait until your full retirement age to claim them. At 62, you would receive smaller monthly benefits starting five years before your full retirement age of 67 or full benefits if you wait until 67 to claim Social Security. If you live to about 78, the amount you claim up to that breakeven point would be about the same whether you chose reduced benefits early or larger benefits at your full retirement age. But if you live beyond the breakeven age of 78, all the benefits from that point forward would result in larger total benefits over your lifetime. And keep in mind, 78 is less than the average life expectancy. A typical 65-year-old man will live to 84, a typical 65-year-old woman will live to 87, and for married couples, there’s a 25% chance that one spouse will live until at least 92.

What about delaying benefits until they are worth the maximum amount at age 70? The difference between claiming reduced benefits at age 62 versus waiting until age 70 to claim your maximum benefit means your monthly benefits would increase by 76% for the rest of your life. You would have to live to about 83 to make the decision to delay claiming until 70 worthwhile in terms of total lifetime benefits, but that’s still less than average life expectancy.

And then there’s always that question: Even if it’s a slightly better decision to delay, what happens if I die before that? That’s when it depends on your marital status. If you’re single, choose to delay, and die before claiming, that’s unfortunate, because technically, you don’t have any survivors, and that money just goes back into the social insurance pool to be distributed to other beneficiaries. If you’re married and you die before claiming, your surviving spouse is going to be eligible for a survivor benefit based on what you would have been entitled to when you died.

For example, say you were married and planned to wait until age 70 to claim your maximum benefit. But you died at age 68, two years after you reached your full retirement age of 66. Your surviving spouse would be entitled to survivor benefits worth 100% of what you were entitled to at the time of your death. In this case, the survivor benefit would be worth 116% of your full retirement age amount thanks to two years of delayed retirement credits worth 8% per year. Assuming your widow was at full retirement age when she claimed survivor benefits, she would receive the full amount of the benefit you had earned by the time you died—even if you had not yet claimed them.

Benz: Is breakeven analysis a good idea, then?

Franklin: The Social Security Administration used to include a breakeven analysis calculator on their website. Researchers found that when people used this calculator they were more likely to claim early, thinking, “I’ll never live that long. I’m going to grab it while I can.” Social Security no longer has that tool on their website because they felt it was detrimental.

Benz: I sometimes hear from people who are worried about Social Security and they say, “I’m going to take my money and run because I’m worried about the health of the program.” Is that the sound way of thinking about it?

Franklin: There are a lot of people who have that concern. They don’t trust the government. They think the trust fund is going to run out, or they think Congress is going to change the rules. Higher-income employees, especially, might think they’re going to get screwed somehow. So, they take it at age 62.

If you file for Social Security at 62—let’s assume your full retirement age is 67—that’s five years early. You’re immediately taking a 30% cut across the board. You’re getting 70% of your full retirement age benefit for the rest of your life. Let’s imagine a worst-case scenario that in 2033 the trust funds run dry and that Congress does nothing, which is really quite unthinkable. But for argument’s sake, let’s say Congress has done nothing. Now there’s only enough money from ongoing payroll taxes to pay 80% of benefits. You’ve already taken a 30% haircut and now you’re going to take a 20% haircut on top of that.

Is that worth the gamble? I don’t have a crystal ball. I believe that people should only make decisions based on current law. If you need the money because of health or finances, you should claim it whenever that is. You need it. But if you’re claiming early out of fear, that’s like selling stocks in a down market. The only thing you have guaranteed is you have locked in a loss.

Excerpted with permission of the publisher Harriman House Ltd. from How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement by Christine Benz. Copyright (c) MMXIV Morningstar, Inc.