I saw a short video where a former financial advisor turned finfluencer said he was going to take his Social Security at 62 to invest it and went on to explain why. He was youngish looking, so I doubt he's 62 yet. I don't have a link, I wasn't planning on writing about it but then as I thought more about the video, there's a big piece missing, so maybe the group here can help.
He said that we would come out ahead by taking the money at 62 and investing it versus waiting until 70. He said his breakeven between taking it at 62 versus waiting until 70 to take it was 79 meaning he'd start to come ahead with more money by waiting when he is 79 going the conventional route. That number makes intuitive sense. My breakeven is like 78.4.
He said that by investing it though, the breakeven is never, that waiting for the age 70 amount never beats taking it at 62 and investing it. His age 62 and age 70 numbers are very close to mine so maybe he's my age? Rounding off a little, his age 62 amount is $2500 and his age 70 number is $4600. For the rest of this post we'll stick with 2025 dollars.
I asked Copilot to do the math on investing $2500 per month into an S&P 500 Index fund for eight years assuming 7% compounding, how much would he have accumulated? At 7%, there would be $324,000 at age 70, compounding at 5% there'd be $292,000 and at 9% there'd be $360,000. Yes, the index has been compounding at a higher rate for a while but planning on 12% is bad planning.
Assuming $360,000 which might be very generous and assuming a 5% withdrawal rate which is a little aggressive but not unreasonable, there would be $18,000 in portfolio income per year at age 70 plus $30,000 of Social Security income assuming the money is now spent on living and lifestyle, so $48000 per year total. In this scenario, using his numbers, waiting until 70, the Social Security income would be $55,200.
Where the finfluencer's idea might make sense on its face is if you think of the $360,000 accumulated by age 70 as a normal, sustainable portfolio. At a 4-5% withdrawal rate, it should of course last for a very long time. It would probably sustain taking out $22,000 per year versus a 5% growth rate. Copilot said it would last 90 years but I don't think that would actually work against a normal distribution of returns versus the linear 5% Copilot was working with.
But here's the part I don't get. If he takes it at 62 and invests it, he can't really work and make any kind of meaningful income. If he makes $100,000/yr, which is a fine income but not killing it, then because of the so called earnings test, his SS income would get reduced to zero. He'd have nothing to invest in that case. If he's not working, where is he getting the money to live on?
Is he spending down from his IRA or taxable account? If so, there would seem to be a Peter paying Paul element to his idea. He could have a very large Roth so he'd be getting tax free income that way. Does his spouse work? Sure, that could be the case but then he gave up his income to invest $2500/mo in an index fund? Would anyone actually be better off doing that?
Taking income from an enormous Roth IRA could work. Copilot thinks only 0.1%-0.3% of all Roth IRAs have at least $2 million. He could be one of few people with a Roth that large but then his advice doesn't make sense for too many people at all.
Please leave a comment if I am missing something. I must be missing something because this makes no sense.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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