A federal employee has many decisions to make at retirement.
When to retire? When to use the TSP? How to handle Medicare? And the list could go on and on.
But without fail, one of the most common (and important) questions to answer is when to start Social Security. Getting this decision right can easily make a difference of $10,000’s or or even $100,000’s.
Should I File Social Security Early and Invest It?
There are many pros and cons about taking Social Security early or later and these two articles go over the main things to think about.
-4 Good Reasons to Start Social Security at 62
-Watch this Before You Take Social Security at 62
But today, the one factor that I am going to address is if you should take Social Security early and invest it.
Social Security Guaranteed Returns
If you are thinking about taking Social Security early to then invest it then you have to know what you are competing against.
For those that don’t know, for every year that you don’t take Social Security then your benefit increases.
More specifically, for the first couple of years that you delay Social Security beyond 62 you get a 5% increase (every year) and you get a 6.6%/year increase for the 3 years before your Full Retirement Age.
Note: Your full retirement age is based on your birthday. You can find a chart here.
For those that delay beyond their full retirement age, they get an 8% increase. The latest you can delay Social Security is 70.
Guaranteed Returns
So in order for it to make sense for you to take Social Security early and invest it you would have to earn more than 5% the first couple of years, 6.5% for the next few years and then 8% for 3 more years after that.
However, these types of returns are not unheard of.
For example, the last 10 years have been an incredible time for the market and it has grown more than 10%. However, the stock market is far from guaranteed.
While the market can do incredibly well it can also do very poorly as well as we saw in 2008 and 2020.
The reason beating Social Security returns is so hard is because you would have to have a guaranteed return of 5%-8% for 8 years in a row.
And because interest rates are so low right now, it is very difficult to get anywhere near these levels of guaranteed returns anywhere.
If you bought a fixed annuity right now you may be lucky to get a guaranteed 2%-3%.
Conclusion
As a general rule, I discourage people from taking Social Security early just to invest it on their own. There is certainly a chance that they could do better than Social Security but they are taking a risk.
And because of our current low-interest-rate environment, Social Security’s growth can be hard to beat.
