Maximizing Social Security Benefits: Is Investing Early Retirement Payments Better Than Delaying Benefits?

When it comes to retirement, many women ask: Should I claim Social Security early and invest the payments, or wait until 70 for potentially larger benefits? For many, this is one of the biggest financial decisions they’ll face. While early Social Security payments might be appealing, delaying benefits can significantly increase your lifetime income, especially for women who are single, divorced, or widowed. A well-planned strategy can aim to provide financial stability and peace of mind during retirement.

In this article, we’ll dive into the pros and cons of investing early Social Security payments versus delaying benefits. We’ll also explore key considerations such as survivor benefits, risk tolerance, and tax-efficient strategies to help you make a confident decision.

Understanding the Social Security Break-Even Analysis

Many retirement calculators focus on the break-even age—the point when the total amount you would receive by delaying Social Security surpasses what you'd have gotten if you started claiming earlier. For example:

• If you claim at 65: Your monthly benefit might be $2,500.

• At 67 (Full Retirement Age for those born after 1960): You’d receive $3,000.

• If you wait until 70: Your monthly payment could increase to $3,720.

These numbers suggest that delaying benefits by five years could potentially lead to an increase in this case, possibly over $1,200 per month. But break-even analysis alone doesn’t answer every question. It overlooks the possibility of investing early payments and other important considerations, such as longevity risk and survivor benefits.

Key Questions for Women Navigating Retirement

For women nearing or in retirement, Social Security strategy is crucial, especially for those managing their finances independently for the first time. Here are a few questions to help frame your decision:

1. Do you need income immediately, or can you wait?

2. Are you comfortable with investment risks, or do you prefer a guaranteed return?

3. Will delaying benefits maximize survivor benefits for a spouse?

4. How does your health and expected lifespan impact the decision?

Understanding your financial goals and risk tolerance is key to making the right Social Security decision.

How Risk Tolerance Affects Your Strategy

Claiming Social Security early and investing the payments can seem like a good idea—especially if you believe you can outperform the 8% annual increase that Social Security offers for each year you delay. However, investments come with risks. The market can be volatile, and losses during a downturn could leave you worse off.

Consider this scenario:

• You start Social Security at 65, receiving $2,500 per month.

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

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

On the other hand, waiting until 70 guarantees a larger Social Security payment—one that lasts for life and adjusts annually for inflation through Cost-of-Living Adjustments (COLA). This risk-free increase appeals to many retirees, particularly those concerned about outliving their savings.

Survivor Benefits: What Women Need to Know

If you’re widowed, divorced, or married, survivor benefits can play a critical role in your Social Security strategy. The higher-earning spouse’s benefit can become the survivor benefit if they pass away.

For couples, it often makes sense for the higher-earning spouse to delay claiming benefits until 70. This ensures that if they pass first, the surviving spouse receives the largest possible survivor benefit.

Here’s a potential strategy for couples:

• The lower-earning spouse starts receiving their benefit early—perhaps at 65—and invests part of it (if qualified) in a Roth IRA.

• The higher-earning spouse waits until 70, maximizing their Social Security benefit.

• When the higher earner starts benefits, the lower-earning spouse switches to spousal benefits if higher than their own.

This approach creates tax-efficient growth through the Roth IRA while ensuring maximum survivor benefits for the lower-earning spouse.

Roth IRA and Tax-Advantaged Strategies for Couples

Women nearing retirement often worry about taxes eating into their retirement income. One strategy to combat this is contributing to a Roth IRA with early Social Security payments. Since Roth IRA withdrawals are tax-free in retirement, this helps create tax diversification.

Here’s how it works:

• If you or your spouse earns income, you may be eligible to contribute to a Roth IRA (subject to income limits).

• Over five years, the lower-earning spouse could invest their Social Security payments in the Roth IRA, growing the funds tax-free.

• Later, withdrawals from the Roth IRA won’t increase your taxable income or Social Security taxation.

This strategy provides financial flexibility by balancing taxable and non-taxable income sources.

Why Delaying Benefits May Protect Against Longevity Risk

One of the biggest risks in retirement is longevity risk—the chance of outliving your savings. Women generally live longer than men, which means securing reliable income for life is crucial.

Delaying Social Security benefits may potentially increase your monthly income, which could help manage longevity risk. If you live into your 80s or beyond, the higher monthly benefit could add up to hundreds of thousands of extra dollars over your lifetime. This peace of mind can outweigh the potential gains from investing early benefits.

How to Make the Best Social Security Decision for Your Future

Ultimately, the right decision depends on your financial goals, risk tolerance, health, and family situation. Here are three key takeaways to guide you:

1. Claim early if you need income now and can tolerate investment risk.

2. Delay until 70 if you prefer a guaranteed, larger benefit and are concerned about outliving your savings.

3. Plan strategically for survivor benefits to protect your spouse’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, taking benefits at 65 or 67 makes sense. If you want a higher lifetime income, waiting until 70 could be more beneficial.

2. Will my Social Security benefits be taxed?
Yes, Social Security benefits can be taxed if your combined income exceeds certain limits.

3. Can I switch from my own benefit to a spousal benefit?
Yes, you can switch to a spousal benefit if it’s higher than your own, but only if you meet certain requirements.

4. How do delayed retirement credits work?
For each year you delay benefits past your Full Retirement Age, your payments increase by about 8%.

5. What happens to my benefits if I keep working?
If you claim Social Security before FRA and earn above the annual limit, your benefits may be temporarily reduced.

6. Is a Roth IRA a good idea in retirement?
Yes, having assets in a Roth IRA may offer tax-free growth and withdrawals, making it an excellent tool for tax-efficient retirement planning.

Final Thoughts: Take Control of Your Retirement

Understanding Social Security can be complex, but a well-planned retirement income strategy can potentially offer financial stability and peace of mind. Whether you’re single, divorced, or widowed, it’s important to make decisions that align with your long-term financial goals.

At Blake Wealth Management, we specialize in helping women like you plan for a secure and fulfilling retirement. With over 25 years of experience, we understand the challenges women face when taking charge of their finances. We are here to guide you through every step of the process, helping you understand how your Social Security strategy could potentially align with your unique situation.