There’s a reason age 62 has long been a popular one for claiming Social Security — it’s the earliest age you can sign up to collect those monthly benefits. However, there’s also a big problem with claiming Social Security at age 62 — you reduce your monthly benefits for life.
You’re entitled to your complete monthly benefit based on your individual wage history at full retirement age. That age is 67 if you were born in 1960 or later. And in that case, signing up for Social Security at 62 means facing a 30% reduction in your monthly payments. That’s a pretty notable hit.
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Now some people wind up claiming Social Security at age 62 because they have no choice — they’ve been downsized out of a job and can’t find work elsewhere. Or, in some cases, people sign up at 62 because they’re no longer capable of working.
But what if your thought is to sign up for Social Security at 62 to get your money sooner, and then invest your benefits for what could be a pretty solid return? It’s a good idea in theory — but one that could end up backfiring on you.
Why take the risk?
You might assume that if you claim Social Security early and invest the money, you’ll come out ahead financially. Let’s say you’re entitled to a $2,000 monthly benefit at age 67 but you sign up at 62 and get $1,400 a month instead. That means you’d receive $16,800 in Social Security your first year. If you were to then invest that $16,800 at age 63 at an average annual 10% return, which is in line with the stock market’s average, by age 93, you’d have about $293,000.
Because of this, it’s easy to see why claiming Social Security as early as possible might appeal to you if you’re comfortable with the idea of investing. But you should know that in doing so, you’re taking a big risk.
Just because the stock market’s average return is about 10% doesn’t mean that’s what your portfolio will deliver during your investment window. And also, stock market returns are never guaranteed. However, a larger monthly Social Security benefit is guaranteed if you wait until full retirement age to sign up.
In fact, let’s add up a $600 hit to your monthly benefit over a 31-year period, which is what we’re looking at in the example above. In that case, you’re losing out on a guaranteed $223,200 in Social Security.
Now it’s true that based on the numbers we just ran, you could be looking at $293,000 if you file early and invest the benefits you collect your first year of claiming Social Security. But the difference isn’t so substantial that it’s worth the risk.
And also, that $293,000 figure assumes a 10% average annual return. If we knock that return down to 8%, we’re left with about $169,000. In that scenario, you lose out on income by claiming Social Security at 62 to invest the money. And an 8% return in an investment portfolio is not a shabby one at all.
You may not want to file early unless you really need to
It’s one thing to claim Social Security at 62 because you’re out of work or you need the money at that moment for another reason. But it’s another thing to intentionally slash your monthly benefits for life so you can invest the money and make a profit.
If you’re eager to invest more in your early 60s, continue to work a bit longer and set aside a portion of your income for that purpose. That may be a much safer route than committing to a massive monthly pay cut for the rest of your retirement.
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