For a number of Americans, taking Social Security benefits at 62 is not so much a choice, but more of a necessity. A large fraction of Social Security participants rely on the program for the majority of their income, and for some, their Social Security check is just about the only income they can count on each month.
Those who have managed to save up a healthy nest egg for retirement have more options. Delaying Social Security can be attractive, as it allows them to get larger monthly benefits later on, and often pass those higher checks on to their loved ones in the form of survivor benefits.
But there’s a choice that very few Social Security experts talk about — taking Social Security at 62 even if you don’t really need it, and investing your monthly benefits to generate additional returns.
Most people looking at Social Security concentrate on the total amount of money they are likely to get over the course of their lifetime. This is mostly because Social Security has argued that its benefit formula is designed to pay out roughly the same regardless of when you claim benefits. This assumes that you live to roughly your actuarial life expectancy.
This approach has created a breakeven analysis, which looks more closely at the impact of when you claim benefits.
If you just look at total dollars paid after adjusting for inflation, traditional breakeven analysis concludes that living through your late 70s or early 80s is the typical time at which delaying benefits starts to pay off.
But the problem with traditional breakeven analysis is that it doesn’t reflect the time value of money. That might not matter so much for the many retirees who need to spend their Social Security as soon as they get it, but for those who can invest their benefit checks, however, the time value of money makes a huge difference, because investing early benefit checks provides a longer time horizon for investment growth.
Even modest return assumptions can make a marked difference in your analysis of when to claim Social Security.
For those who do have the financial resources to invest their Social Security, considering the time value of money is a worthwhile exercise. You might not end up changing your claiming decision because of it. But in some cases, it can make a big different in your overall financial well-being in retirement.