Dave Ramsey is known for offering bold, straightforward financial advice. Though his advice is smart, it sometimes challenges conventional wisdom. One of his more debated positions involves when to claim Social Security benefits. While many financial experts recommend delaying benefits for as long as possible to maximize monthly payments (especially if you are likely to live to an advanced age), Ramsey has suggested that most people would benefit from claiming as early as age 62 and putting that money to work elsewhere.
His approach centers on the idea that consistent and disciplined investing can very likely outperform the guaranteed increases that come with waiting. However, this strategy isn’t without risks and trade-offs, especially when factors like market performance come into play. Afterall, returns are never guaranteed. Here’s a closer look at Ramsey’s advice, how it works, and whether it makes sense for your financial situation.
Ramsey says you should claim Social Security early for one key reason
Ramsey doesn’t believe you should grab your Social Security check at the youngest possible age and start living a life of leisure with it. Instead, he believes that the best course of action is to start your payments as soon as you’re eligible and then invest the money into a good mutual fund.
Ramsey argues that, if invested successfully, those funds could potentially outpace the increase in benefits from delaying.
Though delaying benefits effectively increases your guaranteed monthly income, Ramsey believes you can earn a better ROI by investing the money you take from early withdraw.
Why Ramsey may be right
Ramsey has an interesting point about the benefits of investing Social Security.
When you claim Social Security before your full retirement age (which depends on your birth year), your monthly benefit is permanently reduced. The reduction is about 6.7% per year for the first three years you claim early, and about 5% per year beyond that. By waiting until your full retirement age, you avoid these reductions. If you delay benefits beyond that point, your payments increase by about 8% annually until age 70.
There are a number of safe, reliable mutual funds and ETFs that have historically produced better returns than the ROI from a delayed claim (but results are not guaranteed and depend on market conditions). You also benefit from compound interest once you invest your money, which means that your returns earn added returns and your money grows more quickly.
Social Security’s Cost of Living Adjustments, or periodic benefit increases designed to help benefits keep pace with inflation, are calculated using a formula that many believe is faulty. It underestimates the true inflation retirees experience. The result of this problematic formula is that benefits have lost 20% of buying power since 2010, according to the Senior Citizens League.
If you’d rather place your faith in your own investment ability instead of waiting out the clock for larger checks, then following Ramseys’ advice is the way to go. Just be sure you have a very solid investment strategy, and you actually commit to investing the funds.
A financial advisor can help you to decide if this strategy is right for you. They can also help you figure out the best investments for your situation so you can make the most of Ramsey’s solid advice.
Understand the Risks of Investing Your Benefits
Ramsey’s strategy of claiming early and investing the money depends on several important factors. Market performance plays a major role, and returns are never guaranteed, especially over shorter time frames. If you believe Ramsay’s plan to be fool proof, take a second to check your expectations.
This plan also requires discipline; you must consistently invest the money rather than spend it, which is straightforward in theory, but can be difficult in practice. If these conditions aren’t met, the strategy won’t outperform simply delaying benefits, making it important to carefully evaluate your financial habits and risk tolerance before choosing this approach.
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