Financial Experts: Here’s What You Should Consider Before Investing Your Social Security Check
Written by
Yaël Bizouati-Kennedy
Edited by
Chris Cluff
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When it comes to claiming your Social Security benefits, there is a wealth of advice available for Americans, with varying perspectives on the ideal timing. However, amidst these discussions, a topic often overlooked is what you should do with your Social Security checks and whether investing these funds would be a wise money choice.
According to the Financial Planning Association, one argument is that “an early claiming decision will provide an opportunity for investments to grow and support better retirement outcomes.”
On the other hand, this view misses some points about retirement income as “retirees may not invest this aggressively, and retirees must fund spending from assets and do not experience simple time-weighted returns,” the Financial Planning Association added.
Deciding whether to invest Social Security checks or not depends upon a variety of factors, but to guide your decision, there are some questions to ask yourself to determine which approach makes sense for you, said Andrew Crowell, financial advisor and vice chairman of wealth management at D.A. Davidson.
Questions To Ask
First, ask yourself whether you have other sources of tax-free or tax-efficient income that you can live off instead.
“Withdrawing funds from a traditional retirement account is 100% taxable income,” Crowell said, “whereas Social Security funds are only 50% to 85% taxable depending upon income.”
Then, look at whether you have at minimum a three- to five-year time horizon on any invested Social Security funds.
“The stock and bond markets can be very volatile,” Crowell said. “Over longer periods of time, they tend to go up in value; but, for shorter periods, it’s not guaranteed.”
Finally, ask yourself whether you can afford to delay taking Social Security until age 70, as doing so increases your benefit by roughly 8% annually, and this guaranteed return is more competitive and predictable than many more volatile equity investment possibilities and without the same market risk, he added.
What Part of Your Income Is Social Security?
Whether you should invest your Social Security benefits or not is more a question of mindset and how you categorize money, said Bobbi Rebell, CFP, founder of Financial Wellness Strategies and author of “Launching Financial Grownups: Live Your Richest Life by Helping Your (Almost) Adult Kids Be Everyday Money Smart.”
“The truth is Social Security checks are income just like any other income sources that you may be receiving in retirement,” Rebell said.
According to her, the key is to look at what percentage of your income your Social Security represents and see how that aligns with the asset allocation that is right for this stage in your life and go from there.
“In other words, add it to your total income and then make a decision based on your total income, goals, risk tolerance and any other relevant factors,” Rebell said. “Think of Social Security as just another income source. A quick reminder to always keep in mind how different income sources are taxed. Taxes don’t go away even if you are retired.”
First things first: A Social Security check should be used to meet your immediate needs. For instance, if you have bills to pay or a credit card balance to clear, you should do that before thinking about investing any of the cash, said Jason Mountford, trend analyst at investment app Q.ai. Then, if you do have funds left over, investing can allow you to multiply your Social Security check many times over.
“The long-term return of the stock market is around 9% and, at that rate, an investment of $4,000 would turn into almost $10,000 in 10 years’ time,” Mountford said. “If you were to repeat that and invest $4,000 every year for that full 10 years, you’d end up with a whopping $72,000. So in my opinion, investing your Social Security check is a very sensible move for your financial future, as long as setting it aside isn’t going to leave you in financial trouble today.”
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