Here’s how Social Security was created in the U.S.
Social Security benefits get talked about a lot in the U.S. but have you wondered how the benefits work and if they are taxable? Here’s a breakdown.
Just Curious
Older Americans often ponder the best age to claim Social Security.
You can claim it as early as age 62. But the longer you wait, the larger your monthly check, a bonus that maxes out at age 70.
At 62, the average American can expect to live past 80. And based on simple longevity, you’ll reap the most total Social Security dollars in your lifetime if you wait until 70 to claim them. We explained the math in a recent article.
But maybe there’s a way to beat the system. What if you took a smaller Social Security check at 62 and invested the money yourself?
Before we answer that question, let’s revisit how the Social Security bonus system works.
For Americans born in 1960 or later, full retirement age for Social Security is 67. If you claim it then, you get your “full” benefit. Claim it earlier, and you get less money. The minimum benefit, at age 62, is 30% smaller.
If you claim the benefit after 67, the check gets larger, at a rate of 8% per year. The total Social Security “bonus,” between ages 62 and 70, boosts the monthly payment by about 76%, according to Laurence Kotlikoff, a Boston University economist who studies the retirement trust fund.
In an example provided by the Social Security Administration, a typical American who claims Social Security at 62 could claim a monthly check worth $1,400. By age 70, the benefit rises to $2,480.
Based on longevity data, a man who has just turned 62 should expect to live to age 83.6. That means he’ll receive checks for 21.6 years. With a $1,400 monthly benefit, his total lifetime income, not including cost of living adjustments, works out to roughly $362,600.
But if he waits to claim his check, his monthly benefit goes up. By 70, our retiree gets a check worth $2,480, and he can expect to claim it for 13.6 years. His lifetime benefit rises to about $404,200.
That exercise demonstrates that the average retiree would be wise to claim Social Security at 70.
Can you beat the system by investing Social Security checks?
But what if you claimed the benefit at 62, took the smaller checks and invested them? Could your investment outperform the Social Security bonus system?
We posed that question to several experts. The answer: Maybe. But it might not be worth the risk.
“Is it smart? No, it’s stupid,” said Kotlikoff, the Boston University economist. “Because you’ve got something that’s paying an enormously strong return. The government overcompensates you for being patient.”
For every year that you wait to collect Social Security, your monthly payment rises by as much as 8%, plus an annual cost of living adjustment.
That return rivals the stock market, which rises by 6.37% in an average year, after inflation, according to Investopedia. And it’s guaranteed.
“Most investors aren’t going to get returns that beat the 8% rollup and inflation aspect of Social Security,” said Keith Singer, a certified financial planner in Boca Raton, Florida.
Even so, the idea of claiming Social Security early and investing the funds has occurred to many retirees.
“The amount you get increases 8% a year, but you have to wait to get that. You’re not getting any return while you’re not receiving Social Security,” said Jim Sohan, 65, a retiree in New Braunfels, Texas. “An individual would have to be willing to tolerate a certain amount of risk, but if you don’t need the Social Security to live off of, you’re sort of playing with the bank’s money.”
Sohan claimed Social Security at 63 and is thinking of investing the funds.
To ‘beat’ Social Security, you’d have to play a risky game
If you claim the benefit at 62, you would have an eight-year head start over someone who collects their first check at 70. But your checks would be smaller, and they would remain smaller: You would never reap any of the 76% bonus that accrues if you wait until 70.
It’s tricky math. To make up the difference, and “to beat Social Security’s quote-unquote return, you’d have to be investing in the stock market,” said Robert Brokamp, a senior adviser at The Motley Fool.
And the stock market is notoriously mercurial, as events of recent days have reminded us.
“So, it’s pure gambling — and really dumb for most people — to assume they’ll beat this high, guaranteed return by investing in the stock market,” said Monique Morrissey, a senior economist at the Economic Policy Institute. “I would not encourage anyone to do this, except Elon Musk.”
Morrissey’s point: Almost by definition, someone who is able to invest their Social Security checks rather than spend them would have to be independently wealthy. The vast majority of Americans, about 77%, rely on Social Security to pay necessary expenses, according to a 2024 survey by Bankrate.
But some investment experts contend that you can, in fact, beat the Social Security system by drawing your benefit early and investing the money – if you invest all of it, you keep it invested for years, and you earn a consistently high rate of return.
By one Motley Fool analysis, if you manage to earn 5% a year on your Social Security dollars, you could be better off taking the benefit at 62, even with the smaller monthly checks. The potential advantage endures until around age 90: If you live longer than that, you’re still better off claiming the larger Social Security checks at 70, by Motley Fool’s calculations.
This strategy comes with several perils and pitfalls. Perhaps the biggest problem, economists say, lies in the risk you take when you invest your Social Security dollars in unpredictable financial markets.
“You’re taking on the responsibility of investing it to generate those returns,” said Caleb Silver, editor in chief of Investopedia. “You have to be ready to take that risk.”
