I Plan to Claim Social Security at Full Retirement Age Just to Invest the Money. Is This Genius?

Does conventional wisdom about waiting to claim Social Security overlook the potential upside of investing benefits claimed earlier?

It's a question financial professionals often hear from their clients, and one a Reddit user raises in a recent thread wondering whether they would be better off claiming Social Security at 67 — the full retirement age — instead of 70 because they could invest the money.

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Typically, claiming at 70 is advantageous compared to claiming at 67 if a person goes on to live to past a breakeven age (generally in the early 80s), experts say. However, the user theorizes that if they can earn a "modest" return by investing, the math changes.

In that case, "the only way I won't be better off taking Social Security at age 67 is if I live past 90!" the post reads. "I'm healthy, but that's still actuarially unlikely (<50% chance even for 67 yr old non smoker in excellent health, according to [an] online actuarial calculator)."

So, how should you decide when to claim Social Security benefits, and is it smart to accelerate that timeline to invest the money?

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Expert advice: Think carefully about this strategy

The post raises an important point: If a person is able to earn a return on Social Security benefits claimed at an earlier age, it can affect the calculus around the optimal claiming age.

The decision is complex, and several factors are often overlooked. Joseph White, a portfolio manager at Johnson Investment Counsel, explains that delaying Social Security generally nets individuals an 8%-per-year benefit increase. Crucially, that increase is indexed to the inflation rate with the annual Social Security cost-of-living adjustment (COLA), which often comes in at about 3%.

"Perhaps the most critical flaw that I see people make with their assumptions is that the 8% investment return they believe they need to make this work is nominal, meaning NOT inflation-adjusted," White writes in an email. If someone fails to account for the COLA, their calculations will be off: The true investment return they would need to make claiming at 67 beneficial would actually be higher.

Also, around retirement age, investors typically shift their portfolios to limit risk exposure and protect their savings, often at the expense of higher annual returns. Investment returns are still part of the consideration, but that 8% increase plus the COLA may beat a modest gain from investing.

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No matter how someone plans to use the money, one major challenge in deciding when to claim Social Security is the unknown of life expectancy. Delaying benefits generally pays off for individuals who live longer.

"If they are truly investing those payments, claiming earlier does become more relatively attractive and moves that breakeven age out a bit further," White explains.

But in most cases, benefits are not exactly "extra" money to invest, says Matt Coursen, a relationship manager at Plante Moran Financial Advisors.

"Social Security was designed to replace roughly 40% of retirement income, and many retirees rely on that monthly check to cover basic living expenses," Coursen adds.

That's why the Reddit user, and anyone else considering this strategy, needs to think twice before claiming the benefits early.