Kotlikoff: Should you collect Social Security early and invest your benefits?

A piggy bank and cash savings | Courtesy of 401(K) 2012/Flickr
A piggy bank and cash savings | Courtesy of 401(K) 2012/Flickr

Michael: I am 63 until October and a marginally self-employed artist. My wife is employed nearly full time with an employer matching 401 (K) and two small retirement checks from previous employment. Each of us have a traditional IRA. My wife is 61 until September. Our combined annual taxable income is around $40,000 to $50,000.

My benefit is $1,600 a month if taken now, $2,015 if taken at 66 and $2,600 if taken at 70. I estimate that it would take until about age 77 to break even if I wait to 66 to claim, or age 80 to break even by waiting until age 70 compared to claiming now. I would like to take the early option and put part of the money each month into a traditional or Roth IRA to help offset the long-term loss of early filing.

So in a nutshell, we want to start me on Social Security now, put $1,200 a month of my early benefit on a construction loan and mortgage and put the remaining $400 a month into a traditional IRA or Roth IRA.

Can you describe the pros and cons of this idea and how a traditional versus Roth IRA would work in our situation?

Larry Kotlikoff: This is a terrible idea. You can’t count on dying on time. You can’t count on any risky investment paying off.

Social Security rewards us for waiting to collect in two ways. First, it rewards us for the risk of not collecting anything when we wait, because we may die before we collect, or we may die soon after we start our delayed collection. Second, it rewards us for investing with Social Security. That is, not taking the money now means leaving it with Social Security, and Social Security is nice enough to effectively pay us interest on it. Social Security pays us roughly 3 percent above inflation for leaving our money with them in addition to compensating us for the risk of not getting anything or much back because we die too young.

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Laurence Kotlikoff

Boston University economist Larry Kotlikoff has spent every week, for over two years, answering questions about what is likely your largest financial asset — your Social Security benefits. Find a complete list of his columns here.

Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version. His new book, “Get What’s Yours—the Secrets to Maxing Out Your Social Security Benefits,” (co-authored with Paul Solman and Making Sen$e Medicare columnist Phil Moeller) was published in February by Simon & Schuster.


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