Is It Worth Taking Social Security Early and Investing the Benefits?


By Laurence Kotlikoff

Even if you want to collect Social Security early to invest those benefits, waiting until age 70 to collect is likely a safer investment with a better return. Photo courtesy of Dan Brownsword via Getty Images.

Larry Kotlikoff’s Social Security original 34 “secrets”, his additional secrets, his Social Security “mistakes” and his Social Security gotchas have prompted so many of you to write in that we now feature “Ask Larry” every Monday. We are determined to continue it until the queries stop or we run through the particular problems of all 78 million Baby Boomers, whichever comes first. Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version

Mark — Chattanooga, Tenn.: Reading about when to take Social Security benefits, I understand it is normally best to wait. However, I would like to run this scenario by you. My wife will be 62 next year, and if she retires, she would be eligible for the maximum benefit allowed based on her income over the last 10 years.

We don’t need the dollars, but if we took those benefits and 199 percent of them went into conservative growth vehicles, would we not make out better long term? I know it would depend on life expectancy. We are concerned, however, that at some point, means testing will affect those of us who have planned to supplement Social Security.

Larry Kotlikoff: Social Security bases your wife’s (and everyone else’s) retirement benefit on their Primary Insurance Amount (PIA), which is, in turn, based on their Average Indexed Monthly Earnings (AIME). The AIME is computed based on a person’s 35 highest years of covered earnings, with earnings before age 60 blown up by the cumulative growth in economy-wide average annual earnings before they are ranked from highest to 35th highest. After age 60, earnings are entered based on the actual dollar amount earned.

Consequently, your wife’s benefit won’t be determined just based on her last 10 years of covered earnings history. If your wife takes her Social Security retirement benefit at age 62, she’ll be eligible for the minimum retirement benefits, not the maximum. She needs to wait until 70 to get the maximum benefit. Your best strategy may be to have her wait until full retirement age and have her apply just for her full spousal benefit, which will equal half of your full retirement benefit, and then have her wait until 70 to take her own retirement benefit.

But what she does will affect what you can do, and what you do will affect what she can do. So this is an interconnected business and the optimal strategy will depend on your ages, each of your earnings histories and how long you live.

Now, your question suggests you want to take the money and invest it and hopefully make a killing. I don’t recommend doing this. Any higher return you can expect to earn — relative to the relatively high safe return Social Security pays from waiting to collect — comes with significant risk. So evaluating investments in the market, be it in a growth fund or not, requires adjusting for risk. You’ll find that the market return on safe assets pays the Treasury Inflation Protected Securities (TIPS) rate, which is less than the implicit, roughly 3 percent return Social Security appears to be incorporating when it raises your benefits as a reward for your waiting to take them.

Steve — Redwood City, Calif.: I will turn 62 in November. My wife has been the principal wage earner over the past 25 years while I raised our now adult children. I worked as a self-employed manufacturers’ representative from 1991 to 2007. From 1976 to 1990, I earned an average of about $50,000 per year at other regular jobs.

My wife is 57, still working, and has typical annual earnings in the $150,000 to $250,000 range. We each have IRAs with about $300,000 in them and a decent savings account. We owe no money on our house.

There is a possible separation or divorce on the horizon. What would your recommendations be for me? For her?

Larry Kotlikoff: I’m sorry to hear about the pending separation or divorce. Your goal is to avoid going to financial war over this, which will only enrich lawyers. A fair way to resolve any financial conflict is to establish a division of resources that produces the same living standard for each of you going forward.

Economics-based financial planning software offered by my company or other companies that tells you about your future living standards can assist you with this. You can also use software to determine what divisions of assets and levels of alimony, if that’s needed to equalize living standards, will be most tax and Social Security efficient for maintaining the highest equal levels of your future living standards.

For purposes of this answer, I’m going to assume you are getting divorced in the near term. Regarding Social Security, your own best option is most likely to wait until your wife reaches 62 (and can start collecting retirement benefits), and you have been divorced for two years, at which point you will be eligible to apply for a spousal benefit.

When you reach age 70, apply for your full retirement benefit. This will give you half of her full retirement benefit from age 67 to 70 and your largest possible retirement benefit starting at 70. For your wife, the best strategy is to do the same, except she should start her full spousal benefit at age 66 when she reaches full retirement age.

Debra Hennessey — Bradenton, Fla.: How can I find out when my ex-husband, to whom I was married for 17 years but with whom I’m no longer in contact, does anything regarding his Social Security benefits?

Larry Kotlikoff: Unfortunately, Social Security’s privacy provisions are in conflict with the reasonable rights and needs of divorcees to have access to their ex’s past covered earnings records. When you near age 62, the Social Security Administration will give you an estimate of your spousal benefit starting at age 62 based on your ex’s earnings record. They should also tell you the full spousal benefit you’ll receive from your ex if you wait until full retirement age and then apply just for a spousal benefit.

From this information, you can infer your ex’s PIA (Primary Insurance Amount), which will provide you most of what you need to sort out your best Social Security strategy. I say “most” because if your ex is still working, he may raise his PIA, providing you with higher spousal and survivor benefits. This could affect your best strategy for taking your own retirement benefit.

Paul Spector — Pismo Beach, Calif.: I am 63 and am eligible for Social Security Disability Insurance (SSDI). My wife is 64 and needs to work four more quarters. I may receive $1,000 per month from a State Retirement Plan. Should I hold off on taking SSDI?

Larry Kotlikoff: You can’t lose from taking your SSDI. At full retirement age (66 in your case), it will convert to your Social Security unreduced retirement benefit. But at 66, you can withdraw your retirement benefit and wait until 70 to collect it, at which point it will be 32 percent larger.

And, if your wife gets those four extra months of coverage and, thereby, ends up with at least 40 quarters of coverage, she’ll be eligible for her own retirement benefit. In this case, you can also have your wife file for her retirement benefit when you reach 66 and then have her suspend its collection. This will let you take your full spousal benefit, which will equal half of her full retirement benefit. But given that your wife won’t have contributed to the system for that many years, her retirement benefit will likely be very small.

If you worked for a state in a job that wasn’t covered by Social Security, you’ll have your spousal benefit reduced and possibly eliminated by the Government Pension Offset provision (GPO), and your retirement benefit will be reduced by the Windfall Elimination Provision (WEP). But neither the GPO nor the WEP will kick in until you start taking your state pension.

As for your wife, when she is 66, she can apply just for a full spousal benefit based on your earnings history and delay her own retirement benefit until 70, when it will start at its largest level. But if you do this, she can’t get you a full spousal benefit when you are 66 because she won’t have filed for her retirement benefit, regardless of whether she suspends its collection. You cannot both receive full spousal benefits unless you divorce.

Bill — Middletown, Calif: I started drawing Social Security at 62. I drew on it for 16 months then went back to work. Would there be a value in paying back what I received and waiting until 66 to restart?

Larry Kotlikoff: You only have one year to pay back your benefits, inclusive of any Medicare premiums paid out of your Social Security check, and then reapply at a later date for higher benefits. So you’re out of luck on that score.

However, by earning enough to lose all your benefits via the earnings test, you will be able to get higher benefits starting at 66 or, if you suspend your benefit when you reach 66, at age 70. Social Security has a provision called the “adjustment of the reduction factor,” which permanently raises a worker’s retirement benefits starting at full retirement age when he loses months of benefits due to the earnings test.

Indeed, if you were 62 and applied, say by mistake, for your retirement benefit, but earned enough every year through full retirement to lose all your benefits via the earnings test, Social Security would give you benefits at full retirement as if you never applied for benefits before. And if you were to suspend your benefit at full retirement and start it up again at 70, you’d get the largest possible benefit starting then, again as if you’d never applied before.

There’s one thing, however, to keep in mind. If the earnings test wipes out some or all of your benefits, it will also wipe out some or all of the spousal and child benefits received on your work record. The reason is that the earnings test is applied proportionately to all benefits received on the worker’s earnings record. The adjustment of the reduction factor does not, however, compensate you for the loss of these spousal and child benefits.

Tom Bryant — Solvang, Calif: I will be 62 in December and plan on drawing my Social Security while working as a consultant. My wife is 30 and not working. Can she ever get benefits through me? Should we have a baby? Adopt?

Larry Kotlikoff: Your wife can receive spousal benefits before age 62 if she has your child (either via natural birth or legal adoption) in her care and if you have applied for and are receiving your retirement benefit or if you suspended your retirement benefit.

You can’t suspend, however, until you are at full retirement age. But by not taking your own retirement benefit at 62 and waiting until 66 (your full retirement age) to file and suspend, you can permit your wife and children to collect their spousal and child benefits without being forced to take a reduced retirement benefit. Indeed, under this strategy, you could wait until 70 to collect your highest possible retirement benefit.

This entry is cross-posted on the Rundown — NewsHour’s blog of news and insight.