In this episode of Next Act Ninjas, host Rachael Van Pelt delves into a critical retirement decision—when to start collecting Social Security. Conventional wisdom advises waiting until age 67 or 70 to maximize monthly benefits. However, Rachael challenges this approach, highlighting that life’s unpredictability and potential health issues make early collection at 62 a smart financial move for many. By starting earlier, you gain flexibility and control over your investments, potentially growing your nest egg in ways that outpace waiting until later years. Rachael presents a compelling case for early Social Security collection, using the example of a couple investing their benefits in an S&P 500 index fund, leading to substantial financial growth by age 70. This strategy not only maximizes income but also provides an emergency fund and reduces dependency on government adjustments. While the approach carries risks, disciplined investing and careful planning can make it a viable option for those seeking greater financial security and control over their retirement years.
Chapters
00:00 Should we Start Collecting Social Security As Soon As Possible or Wait?
01:56 Conventional Wisdom: Wait until Age 70 to Collect Social Security
02:53 Consider the Alternative: Collecting Social Security at Age 62 and Investing
05:29 Investing Social Security Benefits for Financial Growth
07:51 Collecting Social Security and Growing it Yourself Offers Flexibility
09:10 Risks and Benefits of Collecting Social Security Early
13:25 Taking Social Security Early Requires Discipline
14:33 Deciding When to Collect Social Security is More than Just the Numbers
Welcome back to Next Act Ninjas, the number one podcast for lifestyle longevity. I'm your host, Rachael Van Pelt. Today, I am excited to talk to you about one of the most critical decisions that you're going to make in your 60s, when to start collecting Social Security. I've been thinking about this a lot lately, not because it's a big piece of my retirement portfolio, but because it is a piece that I never thought that I'd get to take advantage of.
I grew up assuming that Social Security would be bankrupt by now and I was taught not to count on it. So every year that it still exists is a bit of a surprise to me. But of course, it's one of the biggest line items in the government's budget, isn't it? It's a hot button for voters during election time, given our top-heavy age demographic, which means it's going to be around for, well, a little longer anyway. The government originally created Social Security to be a safety net to help keep elderly out of the poor house. But today, it has become a major source of retirement income.
Even so, most financial advisors will tell you to wait until you're 67 or 70 to start drawing on Social Security. The logic seems sound. You maximize the money you collect each month if you wait until at least 67, preferably 70. But today, I'm here to offer you a different perspective, one that I think might challenge what you've been told. I want to show you why, at least for many of you, starting to collect Social Security at 62 could be the best financial move that you make. And that's true whether Social Security is a big or a small piece of your overall retirement.
Let's start by acknowledging the conventional wisdom. Financial planners often recommend waiting until you're at least 67 or 70 to start collecting Social Security because you'll receive the maximum monthly benefit if you do that. For every year that you delay, your benefit increases. And if you live long enough, you'll end up with more money over your lifetime, or at least that's the theory, right?
But here's the thing, life doesn't always follow theory, it? Waiting until 70 sounds great on paper, but it assumes that you'll remain healthy, that you can continue working until age 70 if you need to, that you will live past average life-expectancy, and that the government can keep up with cost of living adjustments. But what if things don't go according to plan?
Let's consider an alternative. What if you started collecting Social Security as soon as you're eligible at 62? If you are already considering waiting until 70, that means you probably have other sources of income that you can live on for now. So why not go ahead and collect your monthly Social Security check and invest it yourself over the eight years from age 62 to 70. That's all the government's going to do with it. Well, theoretically, mostly they just print money to cover Social Security, but that's a topic for another day. Regardless, the Social Security Administration currently credits us an 8% increase each year that we delay collecting our benefits. Incentivizing us to wait is in their best interest because they know that a lot can happen in that time period. And, advances in longevity aside, they'd much rather defer those payments and pay you less overall. Sure, if you live a lot longer than the actuarial tables predict, they may pay a bit more. But it is much more likely that you will live an average lifespan and the government will save a buck if you wait.
Financial advisors typically tell us to look at our current health and whether longevity runs in your family to determine whether it makes sense to collect now or later. But that's quite frankly a load of BS. First, genetics rarely dictate how long you live. Genetics is only about 20% predictive of your lifespan. The remaining 80% is determined by your lifestyle and environmental factors. And your health today does not do a good job of predicting your longevity either. You can be essentially disease-free today and a few months later get hit with a deadly virus or a cancerous mutation that was previously undetectable. I'm not saying that to scare you, but rather to make the point that we need to question conventional wisdom on this topic of waiting until we're 70 to collect Social Security.
The biggest benefit from collecting at age 62 is flexibility. You get control over your money earlier. Instead of relying on the government to adjust your benefits for inflation, you can invest the money yourself. And here's the kicker, you can grow that money just as much, if not more, than if you waited until you're 70.
Let's crunch the numbers for a couple in this exact situation. April, she just turned 62. She's eligible to draw $1,700 per month right now. But if she waits until she turns 70, that amount increases to $3,000. Her husband Rich is currently 59. He can start collecting $2,700 per month when he turns 62 in just a few years. If he waits until he turns 70, he'll receive $4,500 per month in Social Security. Fortunately, they don't need the money to live off right away because they're both still working and, let's face it, $7,500 sounds a lot better than $4,400. So at first glance, it looks like it would be better to wait until they turn 70. But what if they decide to invest their Social Security payments in an S&P 500 index fund with an average 8% return? What will that do for their bottom line?
Well, if April starts immediately investing her Social Security check each month, she'll have about $1,360 (after taxes). And when Rich turns 62 and they add his monthly benefit to the index fund, about $2,160 (after taxes), their combined investment will grow to about $347,000 over that 8-year period. Pretty nice, isn't it? Now, at age 70, they plan to stop contributing to those index funds, they'll stop putting that Social Security check in every month, but they'll leave the investment to continue growing.
Their life-expectancy is about 85-86 years of age, so they plan to withdraw about $3,400 per month from that index fund over the next 15 years, from age 70 to 85. If they add that to their ongoing Social Security income of $4,400,that brings their total monthly income to $7,800. That's slightly more than $7,500 that they would have received if they had both waited until they're 70 to start collecting. So this strategy not only maximizes income, but it also offers flexibility and control.
In just eight years, you can grow a substantial nest egg. And it's yours to control. If you need extra funds for medical emergency or home repairs or maybe a once in a lifetime trip, that money will be available. You won't be waiting on a monthly check from the government. You'll have an emergency fund for unexpected surprises, which is important because the reality is that many people start facing health challenges between 62 and 70. You might not have the option to work as long as you planned.
Maybe you've seen this happen with friends or family. They're forced into early retirement due to health issues or because their employer decides it's time for them to go. Ageism is a real problem, I'm afraid. So if you're banking on that higher Social Security check at age 70, but you're suddenly out of work at age 65, what then? You're probably going to start taking out that smaller Social Security payment at 65 anyway. But if you were savvy enough to start collecting and investing at age 62, then at least you would have had three year head start on building a financial cushion. Now, of course, there are risks to the strategy, just as there are with any financial decision.
Let's address some of those risks head on. First and foremost, you must have the discipline to invest your entire Social Security payment after taxes. Yeah, it's still taxed. It's a bummer, right? Maybe they're going to finally pass that proposed bill to remove those taxes on Social Security, but for now, it's considered taxable income. But for this strategy to work, you have to be disciplined if you want to come out ahead. You have to invest it all with the goal of at least an 8% return on your investment. Your best bet is an S&P 500 index fund because they've returned about 10% annually over the past 20 years. But you can do other things with that if you've got a financial advisor that can help you.
That being said, the market can be volatile. We've all seen the headlines about market crashes and downturns. But over the long term, the market tends to grow, doesn't it? Historically, the S&P 500 has delivered solid returns, even with the ups and downs, even taking inflation into account, it's about a 9.5% return. The key is to stay disciplined. Don't panic during a downturn. Just leave your investment alone and let it bounce back. It will continue to grow over the next 20 years. When you do start drawing on that fund at age 70 or whenever, just take out what you need and let the rest grow if you can. You can't do that if you're taking out just Social Security check every month.
Another risk to collecting payments at age 62 rather than waiting till you're 67 or 70 is the risk of a lower survivor benefit. You know, most financial advisors will suggest that the higher wage earner, which is often the man, delay taking benefits until they reach age 67, just in case they die before their spouse. That's because the surviving spouse is eligible for the higher of the two payments when the spouse dies.
But again, if the couple were investing the money that they received starting at age 62, then there's going to be a nest egg growing that the survivor is still going to get, right? And what if the higher wage earner dies before they even reach that full retirement age of 67? Well, the surviving spouse is out of luck. There's no survivor benefit in that situation, in which case they'll wish that they'd just started collecting at age 62.
So in my opinion, there's more risk to waiting until 70 to start collecting for a couple of reasons. First, who knows how long Social Security will be around? We've all heard the debates about the future of Social Security. Whether it's going to be here for us or not, who knows? Will the benefits be reduced? We just don't know. There's a real risk of relying on
Social Security to even be around after we turn 70. Second, even if they manage to keep it going, it is risky to assume that the government is going to adjust your payments to keep up with inflation and the rising cost of living. I mean, if the Feds just keep printing money to keep this behemoth going, the inflation alone is going to keep diminishing the value of our payments year after year. Now the same is true for the value of your money in that index fund, but at least there's more chance that you can grow your money in a way that outpaces inflation.
In my opinion, the sooner that you cash in your chips, the better. By taking control of your Social Security benefits sooner than later, you're reducing your dependency on those unknowns, right? You're giving yourself more control over your financial future. By taking control of your money and investing it, you have a better chance of keeping up with the rising cost of living. Your investments can grow in real terms, potentially outpacing inflation. And that's going to give you more financial security in the long run.
But I want to reiterate the importance of discipline. If you choose to start collecting Social Security at 62 and you invest those benefits, you have to follow through. It will be incredibly tempting to dip into your investments for that dream vacation or a big purchase, but remember your long-term goals matter. This money has to last. It's part of your safety net for the next 20 years. Work with a financial advisor to create a strategy that aligns with your retirement goals, your health, your risk tolerance. You'll also want to consider how it fits with your tax strategy, as I'm sure
you have other retirement funds like a 401k that you're working with. I'll cover this topic in a future episode. Regardless, it isn't a "set-it-and-forget-it" approach. You're going to want to regularly review and adjust your plan to stay on track as your circumstances change.
Bottom line, starting Social Security at age 62 offers you flexibility, control, and the potential for significant financial growth. Sure, there are risks, but with careful planning and disciplined investing, the benefits can far outweigh those risks. Now, ultimately, the decision is yours. It's certainly more than about numbers, isn't it? It's about improving your lifestyle longevity. Do you want to wait and hope for the best, or do you want to take control of your financial future now? For many of you, the answer is clear, start collecting at age 62, invest wisely, and enjoy the peace of mind that comes with knowing that you've taken charge of your future. The government may have created Social Security to be a safety net to keep elderly out of the poorhouse, but you can leverage that income to create more freedom, more security, the life you want.
Thanks for joining me for another episode of Next Act Ninjas. If you haven't already, be sure to subscribe to this podcast. It really helps us reach more people. Until next time, live well, love more, age less, my friends.