When it comes to Social Security benefits, financial experts will tell you to delay taking them in order to avail larger benefits in the end. It makes perfect sense at first glance. Everyone wants bigger benefits after all. But what’s also worth considering is to tap off on your benefits early so you can invest the payments and earn higher interest rates in the process. Before you go ahead and do that, however, it pays to see the picture as clearly as possible.
To illustrate, let’s say you’re 62 and you want to claim your benefits early. You can take £9,000 a year now or £12,000 a year if you wait until the age when you can claim for a full benefit.
As you can see, your benefit gets a 25% cut because of the year difference. If you take inflation into consideration, your £9,000 will become £9,742 when you hit age 66. On one hand, if you wait until you’re 66 and consider inflation, you will receive £912,989 a year because you waited.
There is a difference of about £3,247, a significant sum of money which you can use to cover for expenses, medical bills and other financial needs once you retire. This is why it makes sense to heed experts’ advice to wait until the right age before claiming for Social Security benefits.
But at the same time, there’s the opportunity of investing and earning a higher interest rate between those years you tapped on benefits early. Provided that you know what you’re doing and you invested the £9,000 on a highly diversified stock, mutual fund and bond mediums with a 5% return per year, you’re bound to earn early payments amounting to as much as £41,918. Again, you can see that investing also makes sense consider the potential earnings you may gain if you make the right investment moves.
When considering between tapping Social Security benefit early and waiting, however, you need to look beyond the figures. While the investment earnings may be promising, you need to consider how long that stash of money will last.
If you withdraw a modest amount of £3,247 for the first year once you retire at 66, your earnings may provide you funds only until age 81. In other words, you won’t have anything left from your investment earnings at this point. Add inflation to the picture and you’re money also becomes less in value.
When you opt for investing and you want to stretch your earnings, you may need to take greater risks in order to earn more in Social Security payments. But then again, there’s a problem with this scenario in itself. The great investing risk you take, the higher that chances that you may be putting your Social Security fund in a difficult spot. In the end, you may end up losing money if the investment fails. Add to that the early withdrawals and you may deplete your Social Security fund significantly.
At the end of the day, if you want to make your early withdrawals count and make more money for you, you must be ready to take the risk but smartly and reasonably. The key is thoughtful consideration of this strategy before going through with the process.