If you're like most Americans, you're going to rely on a mix of income sources in retirement, such as savings, pensions, work, and Social Security. In spite of this multi-income strategy, retirement costs, such as healthcare expenses, and inadequate savings, suggests there's a real risk out living the money you set aside during your career. 

While there's no substitute for saving more while you're still working full-time, Americans who are closer to their retirement, and who plan on working at least part-time in retirement, might want to consider claiming Social Security at 62 and investing as much as they can in a Roth IRA. While no one can guarantee if stocks will rise or fall in the future, historically, the market has rewarded people with a decade or longer time horizon. 

An older man in a suit sits against a wall with money falling next to him and a piggy bank.


Social Security plus work?

Sure, the quintessential retirement doesn't include work, but increasingly more baby boomers plan on working at least part-time in retirement. According to research conducted by Transamerica, roughly 40% of baby boomers are embracing training programs that can help them continue working in retirement, and two-thirds of Americans plan on working past age 65.

While waiting to claim Social Security benefits qualifies you for delayed income credits that boost your Social Security, it may still pay off to claim Social Security as soon as possible, especially if it allows you the financial flexibility to invest.

As a refresher, Social Security provides income to retired workers who have accumulated 40 work credits, or about the equivalent of 10 years of work.

Social Security is designed to replace roughly 40% of your pre-retirement income at your full retirement age, or the age at which you qualify for 100% of your benefit. But you can claim Social Security benefits as early as age 62.

If you claim benefits earlier than your full retirement age, however, the amount you receive in monthly Social Security benefits is reduced, and the amount of that reduction depends on when you were born. For example, if you were born between 1943 and 1954, your full retirement age is 66, but if you were born after 1954, the full retirement age slowly increases to 67 (for those born after 1960). 

Because the full retirement age is increasing, and the claim early reduction is determined by the number of months you claim prior to reaching full retirement age, those with a higher full retirement age receive less at age 62 than those with a lower full retirement age. For instance, a person with a full retirement age of 66 receives about 75% of his or her full retirement age benefit at age 62, while a person with a full retirement age of 67 receives about 70% of his or her full retirement age benefit.

Despite the smaller payout associated with claiming at 62, Social Security is designed to pay out -- theoretically -- the same amount in lifetime benefits, regardless of what age you claim. Therefore, if you claim early, the extra years of smaller payments may benefit you more than waiting to claim bigger payments, depending on your life expectancy. 

The breakeven point associated with claiming at 62 versus delaying until full retirement age is in a person's late 70s. If you invest at least some of your Social Security, and markets cooperate, than your breakeven point could be even later in life:

A chart showing a late-70s breakeven point associated with claiming Social Security at either age 62 or age 66.

Source: Author's calculation.

Putting a Roth IRA to work for you

Unlike traditional IRAs, Roth IRAs are funded with after-tax money, and as a result, there are no mandatory withdrawal rules associated with Roth IRAs during your lifetime.

Because required minimum distributions don't apply to a Roth IRA, it can be a wonderful tool for working retirees to boost their nest-egg. In 2017, up to $5,500 of earnings from work can be contributed to a Roth IRA, plus an additional $1,000 if you're age 50 and up. If you continue working in retirement, subsidize that income with Social Security, and then contribute the maximum allowed annually beginning at age, then you could end up with an account worth $122,734 at age 75, assuming a hypothetical 6% annual return. If you don't to touch that money, and it continues growing at 6% annually, then your Roth IRA could be worth $164,245 at age 80, or $219,798 at age 85, without contributing an extra dime.

Admittedly, there's no guarantee that markets will cooperate with this strategy, but the odds do improve over time. A few years ago, Vanguard studied market returns from 1928 to 2012 and concluded that predicting where the market is heading in one year is "essentially unpredictable." However, they also found that the average inflation adjusted return was 8.8% for rolling 10-year investment periods.

A chart showing historical rolling 10-year returns for the stock market.

Image source: Vanguard.

Vanguard's findings were similar to those at Oppenheimer, which conducted a study around the same time. Oppenheimer's study found that since 1950, stocks haven't suffered an average annualized loss in any rolling 20-year holding period. Clearly, the longer your investment window, the better chance this strategy works.

Regardless, if you're considering working, collecting Social Security, and investing in a Roth IRA, there are few things you'll should keep in mind. 

First, while you're younger than full retirement age, Social Security will reduce your monthly Social Security income by $1 for every $2 earned above limits. This year, that limit is $16,920. Any money that gets held back, however, will be used to increase your payment at your full retirement age.

You should also know that working can expose some of your Social Security income to income tax, if your combined income is above $25,000, if single, or $32,000, if married filing jointly.

Overall, deciding when to claim Social Security is a very personal decision, but if you think you'll continue working in retirement, and you worry about outliving your current savings, then working, claiming Social Security, and investing in a Roth IRA could help you maintain financial security in retirement.