Please ensure Javascript is enabled for purposes of website accessibility

This Strategy Could Make Claiming Social Security at 62 a No-Brainer

By Todd Campbell - Apr 2, 2016 at 8:01PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A claim-and-invest approach to Social Security for pensioners may lead to a bigger estate.


Deciding when to start taking Social Security retirement benefits is a difficult choice that everyone has to make based on their specific circumstances. However, there are some cases in which taking Social Security at age 62, the earliest possible age, could be financially savvy.

This is especially true for retirees who will receive retirement income from sources other than Social Security, including pensions and self-funded retirement accounts. Here's why.

Your options
You can choose to begin receiving your retirement benefits at any point between age 62 and 70. If you take Social Security at age 62, then you'll receive less than your "primary insurance amount," or the benefit you're eligible to receive once you reach your full retirement age. Your full retirement age falls somewhere between age 65 and 67 depending on when you were born, but for those who are currently eligible for retirement benefits, it's around age 66.

If you wait past your full retirement age to receive Social Security, then you'll receive an 8% increase in your benefit for every year you delay, up to age 70. Those boosted benefits are the reason why many Americans hold off on claiming Social Security. However, if you're anxious to retire and you have a pension that will provide enough money to cover your living expenses, then waiting to file for benefits may not be the best option.


A strategy for 62
The average life expectancy for someone who is currently 60 years old is in the 80s. However, heart disease, cancer, and many age-related conditions mean that many Americans will sadly pass away sooner than that. In those instances, collecting Social Security early, paying taxes on it as necessary, and letting those checks compound as investments in an investment portfolio can result in a bigger estate than waiting until age 70.

For example, let's say a single retiree named Joe takes his Social Security at age 62 and passes away at 75. Let's also assume that Joe's full retirement benefit is $1,000 a month, and taking Social Security early results in a reduced payment of $750 per month. If Joe invests that $750 every month between age 62 and age 75 in an investment that earns a conservative 6% per year, then he will have added $169,941 to his estate by age 75.

Now let's assume that Joe waited until age 70 to begin collecting his benefit. At age 70, Joe's monthly check would be 132% of his full retirement benefit, or $1,320. If Joe invests that $1,320 monthly check into an account that generates the same 6% interest, then his account would be worth $89,292 upon his death at age 75.

In this case, delaying Social Security results in a portfolio that is worth significantly less than it would be if benefits were taken early.

Not for everybody
Yes, this strategy could result in a bigger nest egg, but there are a lot of "ifs" associated with it. There's no guarantee of a particular investing return, and in fact, the retiree's investments could decline in value. Meanwhile, the Social Security benefit increase for delaying until 70 is guaranteed (barring an unlikely failure of the Social Security system).

This investment strategy will work best for people with pension income to cover their everyday bills, including taxes on their Social Security payments, but it can also be great for people with large self-funded investment accounts to slow the pace of how quickly those accounts are drawn down.

Americans who are withdrawing living expenses from a traditional IRA or 401(k) plan should consider investing their Social Security income in a Roth IRA. Although traditional IRAs require withdrawals at age 70-1/2, people can invest in a Roth IRA up until their death, and doing so may allow them to pass more tax-advantaged on to heirs.

Couples need to consider other variables too, including the life expectancy of their spouse and the fact that their surviving spouse's Social Security benefit would be reduced by taking benefits early. However, for the 22% of private-sector workers and 92% of government workers who receive a pension, this strategy could make claiming early smart. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.