Maximize Your Social Security: Should You Invest Early or Delay Benefits for Bigger Payouts?

When planning for retirement, one of the most important financial decisions involves Social Security:

Should you claim benefits early and invest the payments, or wait until age 70 to receive larger guaranteed payments?

While early Social Security payments may seem appealing, delaying benefits has the potential to increase your lifetime income significantly. This choice requires thoughtful consideration, especially for individuals managing their financial future independently.

This article explores the pros and cons of investing early Social Security payments versus delaying benefits. It also covers key factors such as risk tolerance, survivor benefits, and tax-efficient strategies to help you make the most informed decision.

Understanding the Social Security Break-Even Analysis

Many retirement calculators focus on the break-even age—the point when the total amount you receive by delaying Social Security exceeds what you would have collected if you started claiming earlier. Here’s a quick example:

• At 67 (Full Retirement Age for those born in 1960 or later): Your estimated benefit is $3,000 per month.
• If you were to claim benefits at 65: Your monthly payment would be about $2,500.
• If you wait until 70: Your monthly benefit would increase to about $3,700 due to maximizing the annualized 8% delayed retirement credits. 

These numbers show that delaying benefits increases payments significantly—in this example, by more than $1,200 per month.

A basic break-even analysis for our example would indicate that the "break-even age" would be exactly 80 years old. In other words, at age 80, the lifetime benefits received by starting at age 70 would surpass the lifetime benefits received by starting at age 65.

But break-even analysis alone doesn’t answer every question. Other factors—like investment risk, longevity, and survivor benefits—should also be considered when making this decision.

Questions to Guide Your Social Security Strategy

When planning for retirement, Social Security is a critical component of financial security, especially for individuals taking charge of their finances later in life. Here are some questions to help guide your decision:

1. Do you need income immediately, or can you afford to wait?
2. Are you comfortable with investment risks, or do you prefer guaranteed payments?
3. Would delaying benefits increase survivor benefits for a partner or dependent?
4. How do your health and life expectancy factor into your decision?
5. Could your income change in your later years (pension, inheritance, required distributions from retirement accounts)?

Understanding your financial goals, comfort with risk, and long-term needs is essential to choosing the right Social Security strategy.

How Risk Tolerance Affects Your Strategy

Claiming Social Security early and investing the payments may seem like a good idea if you believe your investments can outperform the 8% annual increase offered by delaying Social Security. However, market volatility can introduce significant risks.

Here’s a potential scenario using our previous example:

• You begin Social Security at 65 and receive $2,500 per month.

• You invest the payments in a diversified portfolio with the goal of achieving a competitive market return.

• However, if the market declines, your investments may lose value, leaving you with less than expected.

Alternatively, waiting until age 70 provides a larger guaranteed payment that will last for life and increase annually through Cost-of-Living Adjustments (COLA). For many individuals, this risk-free growth provides peace of mind, particularly for those worried about outliving their savings.

A Strategy for Couples: Invest While Maximizing Survivor Benefits

Survivor benefits can play a critical role in your Social Security strategy, especially for those with a partner or dependents. The higher-earning individual’s Social Security benefit can become the survivor benefit if they pass away.

It often makes sense for the higher earner to delay claiming benefits until age 70 to secure the largest possible survivor benefit for a partner or dependent. 

Here’s how a potential strategy could work for couples:

• The lower-earning spouse begins their benefits early—perhaps at age 65—and invests part of the payments in a Roth IRA (if qualified).
• The higher-earning individual waits until 70 to claim, maximizing their benefit.
• Once the higher earner begins receiving benefits, the partner or spouse can switch to spousal benefits if those are higher than their own.

This approach helps grow investments tax-efficiently while ensuring maximum survivor benefits for the surviving spouse or dependent.

One important caveat to this strategy. If the lower-earning spouse starts their own retirement benefit before Full Retirement Age (FRA), the benefit will be reduced due to early filing. In addition, the maximum spousal benefit will also be reduced due to early filing.  The maximum 50% spousal benefit is only available if the lower-earning spouse files at Full Retirement Age. 

LEARN MORE: Episode 24 - Understanding Spousal (and Ex-Spousal) Social Security Benefits

➡️ You can review potential early filing reduction percentages here.

Why Use a Roth IRA for the “Invest and Maximize” Strategy?

A common concern for retirees is taxes eating into their income. One way to combat this is by using Roth IRAs in tandem with Social Security benefits. Roth IRA withdrawals may be tax-free, which can provide tax diversification and flexibility in retirement.

Here’s how it works:

• If you or your spouse/partner has earned income, you may be eligible to contribute to a Roth IRA (subject to income limits).
• Over five years, invest early Social Security payments in a Roth IRA, allowing the funds to grow tax-free.
• Later, withdrawals from the Roth IRA won’t affect your taxable income or impact Social Security taxation.
• If choosing to delay one or both spouse’s benefits, you may also consider Roth conversions in lower income years to minimize the future impact of Required Minimum Distributions (RMD) and potentially reduce future taxable income and Social Security taxation.

This strategy helps balance taxable and non-taxable income sources, giving you more control over your retirement income.

Why Delaying Benefits Helps Manage Longevity Risk

Longevity risk—the possibility of outliving your savings—is a key concern for many retirees. Since Social Security payments are guaranteed for life, waiting until 70 to claim benefits helps reduce this risk.

If you live into your 80s or beyond, the additional monthly income from delayed benefits could add up to hundreds of thousands of dollars over your lifetime. For many individuals, the peace of mind from having a reliable income stream outweighs the potential gains from investing early benefits.

Making the Right Social Security Decision for Your Future

Ultimately, the best Social Security strategy depends on your goals, risk tolerance, health, and family situation. Here are three key takeaways to guide your decision:

1. Claim early if you need income now or can tolerate investment risk if you intend to invest the early payments.
2. Wait until 70 if you prefer a guaranteed, larger payment and are concerned about outliving your savings.
3. Plan strategically for survivor benefits to protect a spouse, partner, or dependent’s financial future.

Frequently Asked Questions (FAQ)

1. What is the best age to start taking Social Security? There isn’t a one-size-fits-all answer. If you need income now, starting at 65 or 67 can make sense. Or as early as age 62. Waiting until 70 will provide a higher monthly benefit over your lifetime.

2. Can my Social Security benefits be taxed? Yes, benefits may be taxed if your combined income (known as Provisional Income) exceeds certain thresholds.

3. Can I switch from my own benefit to a spousal benefit later? Yes, if the spousal (or ex-spousal) benefit you are eligible for is higher than your own, you can switch under specific conditions.

4. How do delayed retirement credits work? For every year you delay benefits once eligible at age 62, your payments increase by about 8% annually.

5. What happens to my benefits if I continue working? If you claim benefits before Full Retirement Age and earn above certain limits (known as the Social Security Earnings Test), your Social Security may be temporarily reduced.

6. Is a Roth IRA a good idea for retirees? Yes, Roth IRAs may offer tax-free growth and withdrawals, making them an excellent tool for managing taxes in retirement.

Final Thoughts: Take Control of Your Retirement

Navigating Social Security can be challenging, but with the right strategy, it’s possible to create financial stability and peace of mind. Whether you are planning independently, with a spouse, or with dependents in mind, it’s essential to make decisions that align with your long-term financial goals.

At Blake Wealth Management, we specialize in helping individuals like you plan for a secure and fulfilling retirement. With over 25 years of experience, we’re here to guide you through every step of the process and help you align your Social Security strategy to your unique situation.

Content here is for illustrative purposes and general information only. It is not legal, tax, or individualized financial advice; nor is it a recommendation to buy, sell, or hold any specific security, or engage in any specific trading strategy.

All investing involves risk including loss of principal. Results will vary. Past performance is no indication of future results or success. Market conditions change continuously.

Information here is provided, in part, by third-party sources. These sources are generally deemed to be reliable; however, neither Blake Wealth Management nor RFG Advisory guarantee the accuracy of third-party sources. The views expressed here are those of Blake Wealth Management. They do not necessarily represent those of RFG Advisory, their employees, or their clients.

This commentary should not be regarded as a description of advisory services provided by Blake Wealth Management or RFG Advisory, or performance returns of any client. The views reflected in the commentary are subject to change at any time without notice.