The vast majority of Americans take Social Security benefits early -- that is, before they reach full retirement at age 66. But even though this is often a good idea, some retirees claim benefits early for the wrong reasons.
I was reminded of this recently when reading about a married couple who are planning to apply for benefits at age 62. Billy and Akaisha Kaderli don't need the additional monthly income, but they want to take the cash and invest it in the stock market.
"The S&P 500 index has averaged returns of more than 8% per year, plus dividends, since we retired in 1991," they observed. "If we take Social Security early and invest it, we won't be losing the extra 8% in benefits we could get for every year we delayed receiving them."
However, taking Social Security before full retirement age in order to invest that money in the stock market is not generally the best idea. If you don't need your Social Security benefits at age 62, then you're likely better off simply delaying them, rather than collecting and reinvesting them.
Now, just to be clear, the Kaderlis are a highly experienced and financially astute pair. They were able to leave the workforce at the age of 38 and have since lived off of their investments for two and a half decades. It goes without saying that most people don't have this luxury. That is to say, most people need their Social Security benefits.
According to the Social Security Administration, approximately 34% of the U.S. workforce has no savings set aside for retirement. And among elderly beneficiaries, 22% of married couples and about 47% of unmarried persons rely on their Social Security benefits for 90% or more of their income.
With this in mind, it's important to recognize that there's no guarantee when it comes to stocks, and there is a real risk of capital losses. Sure, the S&P 500 has grown at a compound annual rate of roughly 9% since World War II. But, as you can see in the chart below, that growth has been uneven -- particularly over the last 15 years.
Moreover, the fact that stocks have historically returned 9% is no guarantee they'll stay on the same trajectory forever. In fact, if you look at the demographic trends in the United States -- with baby boomers shifting out of their high-consumption years -- it isn't unreasonable to think that the growth rate in corporate earnings could slow down.
This is impossible to predict, of course, and the market could do just the opposite of what we expect. But the point is that market forecasts cannot be relied upon.
Meanwhile, for every year you delay Social Security benefits -- from age 62 to age 70, when you reach your maximum potential benefit -- you are guaranteed to receive an additional 8% in benefits per year.
If you need to take Social Security benefits early, then, as I've argued in the past, there's no problem with that, even though your monthly checks will be smaller than they would be if you waited. But if you don't need them, then there's little reason not to delay benefits and allow your future payouts to grow over time. A guaranteed 8% annual "return" is hard to turn down.
For people who don't need to take benefits early, then the certainty of larger monthly checks associated with waiting until full retirement or later shouldn't be substituted for the uncertain returns of the market.