Social Security: How Taking Benefits Early Can Increase Your Net Worth

Even though your Social Security benefits grow the longer you wait to receive them, doing so could ultimately reduce your net worth.

Jul 5, 2014 at 7:11AM


Most people are urged to wait as long as possible before taking Social Security benefits, because the size of your monthly checks increase the longer you're able to defer them, up until age 70.

But this advice ignores two important economic concepts: opportunity cost and the law of compounding returns. Indeed, as reader Mike Farabee recently pointed out to me, these factors can make a world of difference when it comes to your net worth.

The opportunity cost of waiting
The problem with many Social Security analyses is that they assume your benefits exist in a vacuum. But this obviously isn't true.

In the absence of Social Security, how is the typical retiree expected to pay bills? In many cases, the answer is that he or she will be forced to withdraw money from a tax-deferred retirement account such as an IRA or a 401(k).

And the longer the retiree waits, the more that person will have to extract.

Take the following chart as an illustration. The three lines trace the value of a hypothetical retiree's 401(k) depending on when the person elects to receive Social Security.


By taking benefits earlier as opposed to later, you're able to both maintain the balance of your 401(k) and even allow it to continue growing. Alternatively, if you wait to receive benefits and instead rely on your 401(k), then its value will immediately fall and could continue to lag for decades.

"What I am seeing is that for even a modest tax deferred growth within the 401(k) of 4%, I would have to live to 89 before taking Social Security at 67 or 70 would match the 401(k) balance by taking it at 62," Mike wrote me in an email last week.

The compounding benefit of taking benefits early
While there's no doubt that waiting to take Social Security has its advantages -- namely, that the size of your benefits grow the longer you wait -- one of its principal drawbacks is that doing so interferes with your ability to exploit the law of compounding returns.

That's because the size of your monthly Social Security benefits doesn't grow at a compounding rate. Every month you delay, they increase by a set percentage of your primary insurance amount. Between ages 63 and 66, for instance, the increase is equal to five-ninths of 1% of your primary insurance amount per month.


Alternatively, the same isn't true when it comes to investments in a retirement account. Assuming all dividends are reinvested, the money you earn in any particular year will end up compounding gains in subsequent years because it too makes money.

This is why it's often said that it takes money to make money.

Consequently, by taking benefits early you're trading out the opportunity for compounding growth with the certainty of non-compounding growth.

Is this worth it?

That's something only you can decide; however, it's certainly worth thinking about.

An easy way to get more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information