Should I Collect Social Security and Invest it? (Before Social Security Runs Out)

Should you take social security income early and invest before social security runs dry?

Health and longevity, taxes, and other income sources are all considerations and we’ll discuss what happens when/if the social security reserve fund “runs out.”

Collect Social Security and Invest it?

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Full transcript:


Alex Okugawa & Anthony Saffer

Alex Okugawa 0:00
Should you take your Social Security benefits early and invest them before Social Security runs out? There are a lot of considerations like health taxes, and longevity, that should be incorporated into your decision-making process. And today we’re going to discuss what will happen when the Social Security reserve fund runs out. Stay tuned. Hey, there, it’s Alex and Anthony, from One Degree advisors. If you’re new here, we are certified financial planners that help folks with all things tax retirement and investment related. So Anthony, let’s get into it. Social Security is set to run out in 2035, according to the latest report, I mean, that date continues to get closer now. It’s, I know, a short 12 years away. And this begs the question for folks that are nearing that retirement age nearing age to take Social Security. Should I take my Social Security benefits early and invest the proceeds? Before Social Security runs out of money? Basically, can you put it in your pocket while you can before it runs out?

Anthony Saffer 1:02
Before there’s no money left? So we’re going to address the ways that Social Security can potentially solve the problem. But first, let’s get into the individual math of saying like, should I take it to invest?

Alex Okugawa 1:12
Am I better off, there are three main things that we’re going to consider today, and we’re going to go through all three of those? But let’s start with the first one, which is it’s really there’s a numbers breakdown of waiting, waiting to take your benefits versus taking the benefits early, and then investing

Anthony Saffer 1:27
the funds. So everyone has a full retirement age is somewhere between 65 and 67. If you take it earlier than your full retirement age, you can take it as early as 62. Or you can let it defer until age 70, where it maxes out every year that you either wait or take it early, it’s about an 8% difference. So you wait, you get an 8% Each year, a little bit higher. So we’re gonna post this image up here, there’s a breakeven calculator. And we’ll post that in the notes here. You can actually calculate, okay, what are my different income estimates through social security based on different ages, and even apply a rate of return if you were to take and invest the money, you know, overall, if you apply, like, say, a six or 7% return, maybe an inflation rate of 3%, six or 7%, return on your money when you take it, invest it so that that concept of I’m going to take the Social Security, I’m gonna, I’m gonna then set it aside invest it, while I still can get it. The break-even point is, like, really around the early 80s, in terms of how long you live, if you live past those early 80s, you’re better off having waited on Social Security, at least according to the math and getting that bump up for the rest of your life with your income.

Alex Okugawa 2:40
Yeah, so there are factors into this, like, how long will you live? Are you married? What are the odds that one spouse will live longer than the other but again, just I just want to recap, it’s, if you know, maybe you weren’t going to live as long that kind of that 80-year-old breakpoint, right? If you’re not going to if you don’t expect to live that long, it could make sense to take them earlier, and potentially invest the money. However, when you live beyond that point, that’s when it makes sense to delay taking Social Security benefits and let them kind of grow and compound.

Anthony Saffer 3:08
Yeah. And if you’re really confident your investment returns, where it gets up to maybe 10%, or something in there, that kind of changes the story a little bit.

Alex Okugawa 3:15
Okay, well, that’s helpful, again, knowing that that age breaks that age breakpoint there. The second thing here is there are tax and income considerations. So it’s important for people to know that Social Security is taxed at the kind of like graduated levels, and there are really three different levels. There are 0% 50% and 85%. And that’s, and it’s taxable based on other income sources, there are 37 states, and we’ll pull this up on the screen that does not apply tax to Social Security. So we’re here in California, California does not tax Social Security benefits, and wrote one quick thing on this taxation of Social Security benefits. People need to realize that the limit before you get taxed on Social Security benefits is really low because it has not been adjusted over time. So it’s, it’s very short before you start getting taxed.

Anthony Saffer 4:05
Yeah, so we’re mentioning this not as a right or wrong type of thing, but that you should do your individual tax planning. So if you’re working, okay, getting a good salary and taking Social Security on top of that, you know, it’s going to be taxed up to 85%. As you mentioned, if you do take it early, can only earn was at $19,560 in 2022. And then you start giving back $1 For every $2 in Social Security that you earn. So you have your taxes plus you’re essentially paying a penalty that overtime does recoup but it’s kind of weird math there. You’re better off waiting until your full retirement age. And then beyond that, make sure you’re doing your own tax planning.

Alex Okugawa 4:43
Yeah, tax planning is huge when it comes to social security because again, it it’s different than the marginal rates, which a lot of people are familiar with when they’re working right 12%, 22% It has its own kind of unique bracket. So paying attention to that is really important. The third consideration issue here is just the timeline of Social Security, right? There’s debt. There’s politics, there’s a future. I mean, right now Social Security is being funded by reserves plus current payroll taxes, right people that are currently working, pay Social Security tax, and that goes into the system. Now, like we’ve mentioned earlier, the reserve is projected to run out and 20 for 2035. And so that would mean so security is then funded by those currently working. And that would make up about three-quarters of the benefits. So I think the big question here is, could this happen, right? Could we run into a situation? And will we run into a switch situation where in 2035, security benefits are all wiped out? And that’s it, right? There’s nothing left?

Anthony Saffer 5:45
Yeah. So if nothing’s done, then a retiree would essentially take a 20% haircut, on their social security benefits, just based on because then the money’s only coming from payroll taxes at that point, and there is no reserve fund. But here’s the thing. And this, you know, there’s a lot of articles out there that will actually post a good one from Yahoo Finance. And it just really talks about like, well, what are the options like? Well, like? What are the solutions? Number one is they could increase payroll taxes, if there’s an increase of three to 4%, on those that are working, and it’s already, you know, 12.4%, between the employee and the employer, you add another three to 4%, that that that does actually solve the problem. It’s not entirely feasible from a political standpoint, that you’re gonna say, Okay, now, everyone that’s working, you know, we can’t guarantee it’s going to be there for you. But you have to keep this going. You have to keep it going. So now your tax is another 4%. Yep. Number two is you could increase the taxable wage limit. Because of social security taxes, payroll taxes are only applied on up to $137,000 or so. And that does change a little bit.

Alex Okugawa 6:52
You can say, well, now you have to pay that payroll tax on a higher amount or an unlimited base, to be perfectly honest. I mean, I know there are probably arguments against it. I feel like this is very likely. And here’s why. Because from a political standpoint, I think I think you could make the appealing argument to say, look, you know, this family making $80,000 100% of their income is being taxed for Social Security, versus the person that makes $300,000. Right? Only $137,700 is being taxed at that rate of 6.2%. Now, you also hit breakpoints, eventually, of additional Medicare surcharge taxes. But I feel like that’s a very likely scenario where you just continue to see more of the tech people’s taxable incomes, getting taxed for Social Security,

Anthony Saffer 7:32
none of these solutions will be popular, but that’s probably one that is likely. And here’s another one that’s probably likely is raising the full retirement age. There’s already precedent for this, right? I mean, people that originally retired during Social Security were at 65. Now it’s more said at 67, pushing it out to 69 or 70. And I think it’s politically feasible. And I think honestly if you go to young people and said, Hey, we figured out a way to solve social security, and we’re pushing out your retirement, not not to when you can retire. But when you can take Social Security to 69 or 70. I think I think a lot of young people would be like, Okay, well, I didn’t expect it to be there at all. Because, you know, my parents are telling me, I’m not gonna get anything.

Alex Okugawa 8:11
Well, it’s something that’s 3040 years down the line, right? I mean, people have a hard time planning up the next week, their plans next weekend, let alone 510 3040 years in the future. So yeah, I agree. It’s something where if you bring that up to people and say, hey, here are the new rules for this cohort that’s going to come up, you’re likely to not get a lot of pushback solution.

Anthony Saffer 8:32
Number four is reduced cost of living adjustments. I think that with inflation being so high, right now, this is probably taking more of a hit, because people are realizing that, hey, inflation, actually is a real thing. And so trying to what, and we posted a video on this, we’ll put the link in there where we already talked about Social Security, the buying power is reduced by about 40%. Over the last 20 years or so, I think this one’s going to get more scrutiny it’s going to it seems like it’d be a tough one. And then the fifth solution is Congress could just act and do something completely different, they find a different way to solve them.

Alex Okugawa 9:04
You know, and we’ll kind of wrap up by saying this, you know, when you look at it, there’s really two pieces. There’s the personal side, and then there’s kind of like the well, what is the system going to do? It’s kind of hard to plan for what you think the political system is going to do. Right? We don’t know, we can’t control that. What we can control is the personal side. What are your current income tax rates? What are your income tax rates likely to be barring? No, you know, big changes to the tax code? How long can you work? How long do you think you’ll live? Right? Those are the factors that we can control. And those usually lead to better outcomes when you focus on the things that you can control, rather than the things that you can’t control like, well, what are they going to do for taxes? Are they going to raise the limit etc? Are you taking Social Security or are you waiting? Do the fact that Social Security is expected to run out and 2035 have any bearing on your decisions? Let us know your thoughts in the comments down below. If you enjoyed today’s video, please Like and Subscribe for more thanks for watching

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