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.
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3 comments:
I think you are not missing anything, Roger, and you are actually being very generous to this incorrect idea by assuming a 9% annual return. I would perhaps use the risk free annual return (currently around 4%) which further shows the inadequacy of this idea.
Thank you. A friend messaged that someone with a small business where they can depreciate all of their income might be able to do this which was not the finfluencer's situation.
This is a very long comment because I've thought about this and calculated for myself for many years (I retired in my 50s and claimed at 62)
Assuming you aren't working and there aren't any mitigating circumstances such as health concerns etc. I still think most people are best taking their Social Security at 62. (Working while collecting adds tax considerations that I've never dived into)
If you desperately need the money to get by, the answer is yes. You may not have much choice. Unfortunately I believe that statistically women tend to fall into this category more often than men.
So this is for the people that "don't need the money". Here is why I think those people are still better off to take at 62.
Just like the person who started saving for retirement at 24 has a huge advantage over the person that doesn't start until 32, (every IRA and 401K pitch show some version of the chart) someone taking SS at 62 has a giant head start on someone that waits until 67 and bigger still over someone starting at 70. This doesn't change just because you are now 62 instead of 22.
Here is my rough math part using roughly my monthly benefit numbers. $2208 per month for 5 years at 2% interest rate will have about $122,000 before they would start to get their "full" benefit of $3154 at 67 and about $198,000 before they would start to collect the max of $3911 at 70. That money is a BIG head start and we've all seen "break even" ages - roughly 76 yrs and almost 86 respectively in my example. Move that 2% up to 5% and the "break even" is even further out, 79 & 100 years ...compounding works...no matter the direction (look at inflation :) )
But I think the break even point and total life time benefit ideas miss the main advantages of taking SS early.
Life expectancy isn't how long YOU are going to live, it's the median expectancy. (I know, everyone is above average ;) ) A lot of folks are going to die before they hit the expectancy age. At 62, the expectancy is much better for women but still at 62, about 8 in 1000 women (13 men) will die before they even hit 63. The number of people not likely to reach 67, 72 & and 82 yr old are 45F/72M, 111F/169M and 353F/466M respectively. Which leads in part to inheritance. Unlike the money in your IRA & 401k plans (and taxable savings), Social Security essentially dies with you. Use the Social Security to live on while you continue to let savings (IRAs, 401K and even taxable accounts) grow. When you pass away, if you didn't use it all up, your designated heirs get it.
Then there are flexibility and opportunity advantages in taking the money up front. i.e Emergency cash. Lets say you fall and break your hip at 65 or something else and you end up in a wheelchair. That $70k+ you already have from collecting SS will go a long way to the conversions necessary to your home for you to stay there (or pay for a move to more appropriate housing). Also, as many have mentioned the things you can enjoy with that money in you mid-60s that might not be so enjoyable or possible even later in life. Like that really cool trip through Europe ending with a Danube river cruise... it may be something you are easily physically be up to and want to do at 64 but maybe not so much at 74
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By waiting to collect a person is making the "bet" that not only are they going to be one of the people that live beyond their life expectancy, they are going to do so by a long enough time to collect a significantly bigger benefit....I mean why do it just to break even? So the person waiting until 67 I'd guess would have a minimum goal of say 87 (they ~48% chance of "winning" what would be ~$150,000 for their ~$122,000 "bet"). The person waiting to 70 to collect essentially can't "win" as their $200,000 "bet" won't pay off until they are 98, only 4% are likely to "win" so those aren't good odds.
So basically, those are the reasons I think most people are better off if they take SS as early as they can.
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