Each month, Social Security's Old-Age, Survivors, and Disability Insurance Trust sends out benefit checks to more than 62 million eligible recipients. Most of these folks (42.7 million) are retired workers -- and many of these retirees rely on their guaranteed monthly payout to make ends meet.
Because of the importance Social Security plays for a majority of seniors, it's fair to say that deciding when to claim benefits is easily one of life's most important decisions. Of course, if you don't give your claiming decision the thought and planning it deserves, you may wind up selecting a risky Social Security claiming strategy that could result in leaving a lot of money on the table. While there are no guarantees when it comes to deciphering which strategy will ultimately net you the most money over your lifetime, here are three of the riskiest Social Security claiming strategies you can employ.
1. Claiming early and investing your monthly benefit in the stock market
One claiming strategy that might seem like a surefire win, but which isn't always the case, is the idea of signing up for benefits well before reaching your full retirement age -- the age at which the Social Security Administration deems you eligible for 100% of your payout, as determined by your birth year -- and investing the proceeds in the stock market. On the surface it sounds like a great idea. After all, the stock market is in the midst of a nine-year bull market rally. Investing your stipend in an index fund or a mix of high-quality dividend stocks may have paid off handsomely in recent years.
However, there are clear drawbacks to putting your Social Security payouts to work in the stock market. For each year you wait to claim benefits, beginning at age 62 and up until age 70, your payout increases by roughly 8%. That's a guaranteed increase in your benefit that would be difficult to beat year in and year out with the stock market. Historically, the market returns about 7% a year, inclusive of dividend reinvestment and when adjusted for inflation.
Furthermore, claiming early to invest in the stock market could potentially hurt your loved ones if you were the family's breadwinner during your working years. For instance, claiming early and not waiting until your full retirement age would limit what your spouse would be able to claim as a survivor's benefit, assuming that benefit was higher than your spouse's own work-based benefit.
Though strong stock market gains have been alluring, purposefully claiming early in order to invest your monthly payout may not be worth the risk.
2. Claiming Social Security early to help pay down debt
Another strategy that certainly has benefits on the surface, but which could ultimately backfire, is the idea of claiming Social Security benefits early to use the extra benefits (assuming you're also working) to pay down debt. More and more seniors are entering retirement with mortgage debt, or even student-loan debt, so the idea of padding your monthly take-home as early as possible in order to reduce your aggregate debt does make sense on the surface.
But there are two issues with this strategy. First, the retirement earnings test could keep you from fully utilizing your Social Security benefits as a secondary source of income. In short, the retirement earnings test allows the Social Security Administration (SSA) to withhold some, or all, of your benefits if you earn more than a certain income threshold each year, and if you claimed benefits prior to reaching your full retirement age. Once you've reached your full retirement age, the SSA won't withhold a red cent, unless you tell them to.
As of 2018, the SSA could withhold $1 in benefits for every $2 in earned income above $17,040 for individuals who won't reach their full retirement age this year. If you will reach your full retirement age in 2018, the SSA can withhold $1 in benefits for every $3 in earned income above $45,360, until you hit your retirement age. The good news is these withheld benefits aren't lost forever. You'll get them back after you hit your full retirement age in the form of a higher monthly payout. However, if you're working and trying to double-dip with a Social Security benefit in order to pay down debt, it probably won't work as planned.
Secondly, as described above, claiming early could wind up hurting the ones you love most by reducing their survivor benefit, should you be the breadwinner and pass away first. The risks of claiming early to use Social Security benefits to pay down debt are greater than you probably realize.
3. Relying on Social Security for more than 50% of your annual income (regardless of claiming age)
Lastly, regardless of when you decide to file for benefits, leaning on Social Security to provide the bulk of your income during retirement is a risky move.
Admittedly, some folks won't have much of a choice. If you haven't saved much for retirement, then working as long as is reasonable -- and waiting as long as possible to claim Social Security benefits -- often makes sense. This way you can at least maximize what the SSA will pay you each month, beginning at age 70.
However, truth be told, Social Security was never designed to replace more than 40% of the average workers' salary during retirement. That means it was never meant to be the primary source of income. Instead, it's meant to supplement pensions and retirement accounts, which are still expected to be the primary sources of income during your later years.
What's more, the Social Security Board of Trustees 2017 report estimates that by 2022, the program will begin paying out more in benefits than it's generating in revenue, leading to a complete exhaustion in its asset reserve in 2034.
Though the payroll tax ensures that Social Security can't go bankrupt, the gist of the trustees' report is that the current payout schedule isn't sustainable. The trustees estimate that an across-the-board cut in benefits of up to 23% may be needed to sustain payouts through 2091. Regardless of whether you wait till age 70, take benefits as early as possible at age 62, or land somewhere in between, this 23% cut in benefits could sting. If you're heavily dependent on Social Security to make ends meet, it might be devastating.
Relying on Social Security too heavily during retirement is a dangerous strategy that I'd strongly suggest avoiding.