As you approach retirement, one crucial decision you must make is whether to claim your Social Security benefits early and invest them or wait until age 70 to maximize your monthly benefit. This blog post will discuss the pros and cons of both options, taking into account factors such as delayed credits and the tax implications of receiving and investing Social Security benefits.
Let’s look at the Pros and Cons of claiming Social Security early and investing the benefits into the stock market.
- Investment potential: Investing your early Social Security benefits in the market could yield higher returns, depending on the performance of your investments over a specific time frame.
- Reduced benefits: By claiming early, your Social Security benefits will be permanently reduced by a certain percentage based on the number of months you claim before your full retirement age (FRA).
- Tax implications: A portion of your Social Security benefits are taxable, depending on your combined income. This could reduce the income you receive and invest, therefore reducing your overall returns from your investments.
- Earnings test penalty: If you are still working between the ages of 62-65 and claim Social Security benefits early, you may be subject to the Social Security earnings test. This means that if your income exceeds a certain threshold, your benefits may be temporarily reduced or withheld. However, once you reach your FRA, your benefits will be recalculated to account for the withheld amount. This will also reduce the income you receive and invest, therefore reducing your overall returns from your investments.
Let’s look at the Pros and Cons of waiting until Age 70 (or sometime after Full-Retirement Age (FRA)) to claim your Social Security Benefits
- Delayed credits: If you wait to claim your benefits until after your FRA, you’ll receive delayed retirement credits equal to 8% per year (plus COLA), increasing your monthly benefit for each month you delay, up to age 70.
- Larger monthly benefit: By waiting until age 70, you can maximize your Social Security benefit, providing a larger guaranteed monthly income for the rest of your life.
- No Stock Market risk whatsoever.
- Opportunity cost: Delaying your benefits means you’ll miss out on the potential returns from investing those benefits in the market.
- Break-even point: If you have a shorter life expectancy, waiting until age 70 to claim your benefits may not be the most advantageous option, as you may not live long enough to recoup the benefits you missed by waiting.
Ultimately, the decision to claim Social Security benefits early and invest or wait until age 70 depends on your individual financial situation, life expectancy, and risk tolerance. By understanding the implications of delayed credits and the tax consequences of receiving and investing Social Security benefits, you can make an informed decision that optimizes your retirement financial strategy.
Consider consulting with us to help you navigate these complex decisions and tailor a plan to your unique circumstances.