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Retirement Answers is a podcast built to help you succeed in retirement. The thought of retirement can be overwhelming and downright scary for many... but it doesn't have to be!
The goal of this podcast is to provide thoughtful insights and strategies to give you the confidence you need to retire successfully. At the end of the day, my ultimate goal for my clients and podcast listeners is to live a fulfilling retirement.
Follow along as I publish a new episode each week covering everything from retirement income planning, tax planning, Social Security, insurance planning, investing, and much more.
Here's to learning everything you need to know to live out your dream retirement!
Typically, it's going to be best to delay Social Security. It's hard to beat a guaranteed six to 8% increase in your fixed benefit for the rest of your life, especially in the markets whenever they're volatile, going up and down, you add emotion to it as well. If we can delay Social Security into the future, we're gonna be building a larger benefit, and you get the benefit for longer at a higher amount. Welcome to Retirement Answers, a podcast built to answer your most pressing retirement questions. If you're someone who's either thinking about retirement or already in retirement, well, you're in the right place.
Jacob:Hey there. My name is Jacob Duke, and each week, I'll be walking through different tips and strategies to help you succeed in retirement. So let's go ahead and get started with today's show. Hey friends, and welcome back to another episode of Retirement Answers. As always, my name is Jacob Duke.
Jacob:This week we are talking about the question that I get commonly, and it is Jacob, should I take my Social Security early and then invest it to get a higher return? Now this is a question or an idea that comes up in a lot of retirees' minds, like why am I going to wait so long to take Social Security? Who knows when I'm going to pass away? I want to get what I can while I can, and if I can get a better return on that money, then I want to go do that. So we're going talk through that question, some of the benefits of maybe doing it that way, but also some of the risks.
Jacob:We're going to walk through a scenario just to kind of flesh that out and give you some context, and then I'll kind of give you my big takeaway, I think, from all of this. So before we jump into that, I wanted to give you this week's listener review, and it comes in from Big Ol' Paul, and I love that name, by the way. He gives the show five stars and he says, It's direct, concise, and useful. Appreciate this information, especially the Simplification Principles. Well, thanks so much for that review.
Jacob:It means a lot to hear that it's been impactful and a and a valuable, podcast for you. If you're like this person and you find the show valuable, please leave a rating review there on Apple Podcasts. Also, you're on YouTube, subscribe to the channel and give this video a like so that other people can find it as well. Okay, let's go ahead and jump in and answer the question, should you take Social Security early and then invest it? So here's what we're going to do.
Jacob:We're going to go through some of the benefits, the risks of doing, this strategy by taking Social Security early and investing it. I want to walk through a scenario where you can kind of apply this or think of this in a contextual way. And then also I want to give you my big takeaway. What I think you should think about in regards to your retirement plan around taking Social Security early and investing it. Now before we jump into that, why is this important?
Jacob:Why is this a question that we have to answer and think through? Well, number one, a lot of people think about doing it this way. They're like, why would I let my Social Security drag out forever? Why would I not go take it, whenever I can? I don't know when I'm going to pass away.
Jacob:And it just kills me to know that I've got benefits I can potentially get and I'm not taking them. Now, the key with that is whenever you, pass away and you either are or are not receiving your benefits, your inheritors don't necessarily get to keep a certain benefit in the future. Now, if you're a spouse, could have a spousal benefit. If you're a survivor of someone who passes away, you could get survivor benefits. But in terms of leaving something to the next generation, you can leave an IRA or a four zero one ks to the next generation, but you cannot leave your Social Security benefits to the next generation.
Jacob:So, that's part of the equation as well, is why would I use benefits that I can leave to someone else in the future? Why would I spend those down and not take this thing that will not get passed on to the next generation? Why would I not use those assets or that income while I can? So that's really the heart of the question. Now another thing that a lot of people think about is I can get better returns in the stock market.
Jacob:So if the market's averaging 10%, why can I not go get 10% in the market? So that's another thought. I can get a higher return in the stock market than I'm getting an increase annually by delaying my benefits. Now it's important to know that every year that you delay taking your benefits past age 62, because 62 is the first age that you're eligible to take a benefit. Now if you take it at 62, it will be a reduced amount.
Jacob:But every year that you delay past that up until your full retirement age, you could get anywhere from five to 7% increases every year on that. Now, once you get to full retirement age and beyond all the way to 70, you get an 8% annual increase on top of what you currently have. So every year that you delay taking your benefits, your benefit is going up. So the question is, is can I get a higher return in the market whenever I'm investing those dollars rather than a five or six or an 8% increase by delaying that benefit? So that's the question.
Jacob:The hard part with that is whenever we start thinking about market returns, we all think about this kind of 10% number. That's what we've always heard. It's kind of the average over time. But the hard part is, is that's the average over a long period of time. What happens if these five to seven to ten years that you are trying to take benefits early and then invest it, what happens if those are really bad investment times?
Jacob:What if that's a bad period of time to be investing in the stock market and you do not get that 10% return you're looking for, instead you only get four or five or six? Now you're behind and you could have gotten a better return by simply not taking your benefits. So we're gonna walk through a scenario in a second going down that road. But before we get there, let's walk through some of the benefits I could think of and then also some risks that I think of here. The first benefit is, if you die early, taking your benefits as early as you possibly can will be beneficial for you, right?
Jacob:Because you're going get at least something out of the Social Security rather than delaying it forever and then passing away shortly, either after you've taken, your benefits or maybe you pass away before you ever take your benefits, right? So if you pass away earlier than expected, you'll probably end up getting more benefits if you take them at 62. Now the hard part is, is there's no true way to know when you're gonna pass away. If we all had that figured out, that would be great, but none of us do. So there are things that can point to that perhaps, whether it's current health concerns you have that you know about personally, maybe family history in terms of longevity, or there might be a risk there.
Jacob:But even then, there are outliers. We So can't base everything on a family history. We have to base it more on what's our current health situation. So if you kind of say, hey, things are not looking good. It might make sense to take benefits early.
Jacob:It could be beneficial to do this. Now, another benefit of taking your social security early and investing it is the expected returns you were hoping to get, they're better than that. What if you get better than average or higher than you expect in terms of your investments? That would be possible. That's possibility, but you have to take a little extra risk to get that.
Jacob:Now, the flip side, we'll talk about in a second, what if you get under that? So there's no way to know, what your investment returns will be and simply going based on long term averages will probably be a mistake because it depends on the current cycle we're in, how things are looking, what's going on, and even then we have no idea what the future holds in regards to stock market returns. So a couple benefits of taking Social Security early and investing it could be, hey, I'm gonna pass away early, therefore I get to take my benefits, invest it, therefore my spouse or my kids or somebody else behind me at least get something out of the deal rather than nothing. Also, Also, you get better than expected returns over the time period that you're investing, that'll be another benefit if you do it this way. Now, what are the risks?
Jacob:I think there are more risks that outweigh the benefits here. The first one here is whenever you take your benefits, let's say you take it at 62, you are locking in a lower income for the rest of your life. Meaning it is not gonna increase more than whatever the cost of living adjustments are. Those could be low, those could be high. Regardless, you're not getting any higher benefits outside of cost of living adjustments.
Jacob:So if you were supposed to get $3,000 at 67, being your full retirement age, and you take it at 62 and you end up with 2,100, then you get 2,100 plus whatever the cost of living adjustments are moving forward forever. So So a couple things there is number one, you're locking in your income at a lower level, but also your cost of living adjustments moving forward are now based on that lower amount and you're not going to get the benefit of a percentage applied to a higher dollar amount in future moving forward. That's So one thing that's gonna hurt you. Another risk of taking your Social Security early is if you've got a spouse and let's say that your Social Security benefit is fairly low, but your spouse's is much higher than yours, and you take it early, that means you're never gonna be able to qualify for the 50% spousal benefit. You'll get lower than that, around 32%.
Jacob:But just know that if you take it at 62, you're locking in a lower spousal benefit forever, which means the spousal benefit might not even be beneficial. Also, there again, you know, whenever you do that, depending on a few other factors, you could reduce the survivor benefit for a spouse. It just depends a little bit there. Obviously, if you delay your benefits forever, that means they get a higher benefit if you ever pass away. So your spouse could benefit more if you perhaps delay rather than take it early.
Jacob:So everything in Social Security kind of hinges on when you decide to take and file for your benefits. So the earlier you do that, the more you're penalized kind of across the board. So that's the first risk is messing up all the other Social Security planning for you and a spouse or even survivors one day. The next risk is what happens if we have really bad market returns? Averages show around 10% in The US markets over thirty year time periods.
Jacob:But across that thirty year time period, you've got many little five to seven year windows that are either really good or really bad. And so what happens if you're in one of those really bad periods of time whenever you were trying to do this strategy? That means that you're gonna get underperformance, which means you're gonna end up with less money than if you had just not taken your benefits in the first place. Now, the hard part there is, I think a lot people assume they're gonna get 10% every year in the stock market. It's just not reality.
Jacob:In fact, more often, I think you're gonna get really high highs, a 20% up year, a minus 15% year, or an up 30% year, or a minus minus 30% year. I think that all averages out to around 10%, but rarely do you ever get 10%. So just know that in a short period of time, it's really risky to assume that you're gonna get a certain investment return. You have to look farther out than that. And so maybe that plays into, your planning in general in terms of investing this and never touching it.
Jacob:But just know that a risk of doing this strategy could be really bad market returns, which means you're not going to get what you had hoped for. Another risk that I see here is increasing your taxes. And that comes in a couple different ways. But first of all, I just wanted to say if you're trying to take your benefits early and then invest it, that means you do not need the benefit most likely. Now, not everyone's in that situation, but if you are and that's what you're trying to do, that means you probably have income coming from other sources.
Jacob:Now that could be that could be anything. That could be part time work, it could be, you know, residuals on some sort of investment, it could be a rental income, it could be distributions from your IRA, it could be anything. And all those different things are perhaps taxed differently, but they do add up to your income, which means you will be taxed on it. So if you add Social Security to that, now you're paying taxes on your Social Security and you're paying more taxes overall. So we have to think about increasing your taxes because if you're going to take money out of an IRA, which is taxed as normal income, if you're going to take money out to live on and then you're going to take Social Security but not live on that and you're going to invest it, that means you're paying a higher tax rate to take money out of your IRA than you would if you were just paying taxes on Social Security alone.
Jacob:Remember, Social Security is not taxed in full. And at most, 85% of your Social Security will ever be taxed, but even then, depending on your income, it could be lower than that. So if you make, let's say $80,000 between like rental income and distributions from your IRA, and you add Social Security on top of that, you're going to be paying, 22 percent on 85% of your Social Security income. So that might not make sense because now you're starting in a deeper hole when it comes to investing that money and trying to grow it above whatever you could have gotten by simply delaying your benefits. We're gonna walk through a scenario like that in just a second.
Jacob:So doing this could increase your tax bill every year, you're and gonna end up with lower benefits for the rest of your life. Another risk here is that most people are trying to eliminate some of the uncertainties around retirement. Like there's already enough uncertainty, we have no idea what the future holds and we can plan for it, but still things are just not gonna go according to plan. So doing it this way and basically saying I'm not going to increase a fixed income that I know will be there. By not doing that, I'm now taking that off the table, lowering that fixed income, and then investing it in something that I have no idea what's going to happen.
Jacob:You're increasing your overall risk profile for your retirement. Now, if you want to have more money, maybe that's the case. But most people end up saying, I'd rather be certain of something. You know, having a little bit of certainty because there's no way to be 100% certain in any of but having something to say, I've got a percentage of my income I need in retirement that is fixed. Like it's not going anywhere.
Jacob:It's cost of living adjusted. It's going up with inflation. And if I can find a way to get a higher benefit based on that guaranteed amount, that's what I'm going to do. So eliminating the risk of having to rely on something that you can't trust in terms of like investment returns, that makes the most sense for most retirees. So just know that this strategy, taking Social Security early and investing it does add a risk element to your overall retirement plan because you are now relying on investment returns to get what you're trying to get.
Jacob:So those are some different benefits or risks that I could think of. Maybe there's more, maybe some things I'm missing there. I'm open to hearing about that if you want to leave a comment down below. But wanted to walk through an example really quickly of just kind of how this might play out and kind of show you what this looks like. So let's say that you're 62 right now.
Jacob:Let's say that your benefit at 67 would be $3,000 per month. Your benefit at 62 being about a 30% reduction would be $2,100 per month. Right now you're living on IRA distributions, you're retired, and you also have some rental income. Let's assume that that income from those two different places gets you to the top of the 12% bracket, so any dollar over that would be taxed at 22%. Okay, so to do this, you're gonna take your Social Security at 62, but now you have to pay taxes on that because of your other income that we just talked about.
Jacob:So you're gonna have $25,000 per year of Social Security income by taking it at 62, and then you have to take 85% of that, which is how much is actually taxable, that comes out to 21,250. And then once you figure out how much of your Social Security is taxable, you just take that and multiply it by the tax rate, which is 22%. Now we're excluding state tax rates here, but your federal tax rate on on your Social Security income would be about $4,675. So to get 25,000 of Social Security income, you're gonna pay almost $5,000 of tax just to get that if you have these other sources of income going on. So you subtract that out and that leaves you with around $1,700 per month in Social Security once you back out the taxes.
Jacob:That's if you take it at 62. So by taking your benefits at 62 to go invest that money, you're going through two different reduction cycles here. The first one is, is obviously you're taking it before full retirement age, therefore you're going to get a reduced amount to begin with, and that reduced amount is locked in forever. And the second reduction is because whenever you have other income sources that are taxable, now your Social Security income is just gonna go on top of that, making more of your Social Security taxable in the first place, but then also you're gonna be paying it at a higher tax rate. So those two reductions are gonna back you all the way down to about 45 to 50% of whatever your full benefit would be at 67.
Jacob:So you're in the hole by about, let's call it 50%. Now you've gotta find a way to make up that 50% and you've gotta do a riskier thing to do so. You gotta invest that money in the market and hope the market cooperates, or hope you pick the right time to invest or the right thing to invest in. Or you could just avoid all of that and say, I'm going to get a six to 8% increases no matter what I do, regardless of current market conditions. I'm going get that because that's the benefit increase every year 62 and after going up to full retirement age.
Jacob:So one is a lot riskier and one is a lot more stable. And I think most retirees are fighting for stability rather than trying to get the highest potential return. Now, whenever I talk about all of this, it has to fit into your plan. So don't just take what I'm saying and go do this because it is what you like to hear. I say apply these thoughts and ideas to your plan.
Jacob:Are you trying to get the highest potential return? Are you trying to leave the most money to your kids or grandkids one day because your income needs are met, let's say. Well, your Social Security and investing it might be the best thing. Now, are most people in that situation? Probably not.
Jacob:But just know we've got to consider this based on our unique plan. Don't just take the rules of thumb. Don't take what I'm saying and say, I'm gonna go do that because Jacob said so. No, really think about it. How does it fit into your plan?
Jacob:What are you actually trying to accomplish? And then you can go make that decision based on what you've learned here. So here's my big takeaway on all of this. When I'm working with a client and we're trying to figure out their Social Security claiming strategy, what's the best thing for them? How do they optimize it, number one, but how does it benefit them, their spouse perhaps in the future, all of those things.
Jacob:What's the best way to get their benefits? Can they delay it based on the fact that they have other sources of income for a period of time? Like what's the best thing? The default for me is always gonna be delayed as long as we possibly can. For a couple of reasons, number one, we're mostly all living longer on average.
Jacob:Number two, we're building up that benefit to a larger amount, so we're gonna have a larger fixed income for the rest of our lives, whether we actually get more over our lifetime, you know, by taking it 62, or taking it 67, or delaying till 70, that's up, you know, obviously up for debate because who knows what the future holds and when you're gonna pass away. Here's the big takeaway I'd like to present to you. I work with clients, I deal with this all the time. We have to make these decisions. How do we optimize social security?
Jacob:What do we do? When do we do it? And those types of questions. Whenever I'm doing that, I like to have a war chest for my clients to pull on and rely on. So, we use buckets, so we make sure we have enough cash, bonds, and stocks in the right places to meet certain income needs throughout a certain period of time.
Jacob:You've heard me talk about that before. But another thing I like to add to that war chest is if we do not need Social Security, let's not take it. Let's evolve a portfolio until we actually need Social Security. That does two things. The first thing is obviously your benefit will be increasing every year that you delay it all the way up until 70.
Jacob:But the big thing for me is this. If we're doing okay in the market, let's say it's even flat, like it's not going up, it's just flat. We're distributing money out of it, that could be beneficial in a couple of ways. It could say, hey, I'm gonna be drawing down my tax deferred accounts, which will help me in the future on RMDs and have those lower than otherwise. If I didn't take that money now, I'd have to do some sort of conversion or figure out how that works.
Jacob:So we could live on our portfolio, draw down the tax deferred accounts while we're not having any other income, helps us on the back end as well. But I like to use Social Security as a way to right the ship whenever things go south in the markets. So it's almost like another tool in this war chest. And I like to say, let's not take it if we don't have to until the market drops significantly. So if the market goes down, we're not going to try to pull in that portfolio the same way that we were all the way up until that point.
Jacob:Therefore, we can turn on Social Security, replace the income gap that we just lost, and now we're back to where we were. Your lifestyle doesn't have to change, the way you live in retirement doesn't have to change, and you get to still sleep at night because you know only a smaller percentage of your income or expense needs are actually going to be taken from your portfolio at that point because Social Security is now meeting the large chunk of your basic needs. So I like to think of it that way. Use it as this last resort almost, if you will, to right the ship whenever things are going really, really poorly, or just know that you've got this in your back pocket. That's a comforting thing for a lot of people.
Jacob:And so that's the way I approach it. Also, you know, why would we add unnecessary risk if we don't have to? That's a question always in the back of my mind. Maybe we have really poor returns and it ends up not working out in our favor. So these are some thoughts I had for you on that.
Jacob:Typically it's gonna be best to delay Social Security. It's hard to beat a guaranteed six to 8% increase in your fixed benefit for the rest of your life. It's hard to beat that, especially in the markets whenever they're volatile, going up and down and you add emotion to it as well. So that's typically my viewpoint. If we can delay Social Security into the future, we're going to be building a larger benefit and you get to benefit for longer at a higher amount.
Jacob:So hopefully this helps as you're making all these decisions. Hopefully this gives some clarity on some of the benefits or the risks there. Again, this is not advice for you specifically. Just take it, do what you will with it, learn from it. Hopefully it helps in some way.
Jacob:And with that, thank you so much for tuning into this week's episode of Retirement Answers. I look forward to talking with you again next week. Hey, it's Jacob again, and I wanted to extend a quick offer to you. If you have a question and you would like to have it answered here on the show, please email me at jacobretirementanswers dot net. And I'd love to answer that question for you right here on the show.
Jacob:Also, I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode. I look forward to talking with you again next week.