Dave Ramsey advises claiming Social Security at age 62, despite the 30% reduction in benefits, to invest the funds for potentially higher returns.
Early claimants who continue to work lose $1 in benefits for every $2 earned over $23,400 annually until full retirement age.
This strategy requires saving enough to cover living expenses while investing Social Security income.
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Dave Ramsey wants Baby Boomers to make an unconventional move when it comes to Social Security. He wants retirees to claim benefits at age 62 and invest the money. This is a sharp departure from the standard advice about claiming Social Security as late as possible to maximize the monthly income you receive in retirement.
While there are some potential risks to this approach, it can also have a lot of merit and is worth considering, as long as you are confident that you can invest your money wisely and give it the best chance to grow.
Ramsey recommends that retirees start claiming Social Security at the earliest age when their benefits become available, despite the fact that this age is well before their full retirement age (FRA) and despite the fact that claiming before FRA reduces the monthly checks you receive. If you start benefits at age 62 instead of waiting until FRA, then you are hit with early filing penalties.
Anyone born in 1960 or later has an FRA of 67, so a claim at 62 would be five years ahead of schedule. As a result, it would lead to a 30% reduction in benefits.
However, Ramsey isn’t worried about that when he suggests starting payments early because he wants you to invest the money. If you put the funds into a high-performance mutual fund, then Ramsey believes you could end up earning more than the additional increase in Social Security benefits that would result from delaying your claim.
Ramsey’s argument certainly has some merit. If you claim early for benefits, your checks are reduced by 5/9 of 1% for each of the first 36 months and 5/12 of 1% for each month before that. The result is about a 6.7% reduction in Social Security for each of the first three years compared to your standard benefit, as well as a 5% reduction for each year before that.
While these reductions mean your benefits are affected, investing the money gives you a chance to earn a potentially better ROI than a delayed claim.
Ramsey believes you can earn an average annual return of 12% from a mutual fund. However, this is a bit optimistic and perhaps even unrealistic for retirees who need to maintain a somewhat conservative retirement portfolio due to their short term until they need the funds. However, while it may be overly optimistic, it’s far from unreasonable to suggest that you could earn an average annual return of 10%, given that the S&P has historically provided this ROI when investing for the long term.
If you take Social Security and invest the funds yourself, you also put your future retirement success in your own hands, rather than sitting back and relying on the government to provide you with the money you need. You can turn that Social Security into a bigger pot of funds that you can use to fund your retirement or provide for loved ones after you’re gone.
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If you’re confident that you can invest, then it might be worth trying Ramsey’s advice. However, there is a bit of a catch. If you start benefits at age 62 and plan to keep working, you could reduce the monthly Social Security income you get if you make too much money from your job.
You’ll lose $1 in benefits for every $2 you earn above a set threshold ($23,400 per year or $1,950 per month starting in 2025). You eventually get it back because the benefits are recalculated at the FRA to make up for the unrecovered payment. However, in the meantime, you can’t double down and get both a big salary and benefits.
This means that if you want to claim early and invest your benefits, as Ramsey suggests, you’ll probably already need a good amount of savings to live on while you collect your Social Security income and keep it for the future. You’ll want to make sure you have this money available as a source of support before you file for Social Security and then figure out i can’t invest the money because you need it to live.
A financial advisor can help you determine both whether you can afford to follow Ramsey’s plan and whether it’s right for you, so it’s worth getting this professional advice before proceeding with a claim for benefits.
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