“The question isn’t at what age I want to retire, it’s at what income.”
–George Foreman
For some people, the thought of a typical retirement is out of reach. Unfortunately for them, life dealt them a bad hand. Maybe it was a business failure, a divorce or perhaps the premature death of a spouse.
Are you are in this situation? These, or any number of other unexpected events, may have left you without the resources to comfortably retire when you had hoped. Social Security alone may not be able to provide a sustainable lifestyle.
There are steps, however, that may give you a large enough financial cushion to make eventual retirement a reality. First, be aware these steps may not be for everyone. There are pros and cons to going down this path. Check it out. If you are in a position of not being financially able to retire, it just might work for you.
Step 1. Continue to work 6 years past the typical retirement age of 65. The example I give assumes working through age 70. Without a nest egg, you would probably need to continue working anyway.
Step 2. As early as possible, usually age 62, start taking monthly Social Security payments.
Step 3. Deposit those monthly checks into an investment account. In the example I use below, it is simply a typical Exchange Traded Fund (ETF) that invests into the S&P 500.
Step 4. The fund will pay dividends. Reinvest them back into the fund.
Here is an example, based on historical averages, of how this might work. This is not a guarantee. We are simply using past results to illustrate this concept. To keep it simple, amounts are rounded off to the nearest $5.00
We begin with $1,300.00. This is about the average monthly amount of Social Security paid to someone claiming benefits at age 62. In this example, this monthly payment is increased by 2.5% annually. Again, that’s about average, historically. Using that rate of increase, by age 70, that monthly payment would grow to about $1,580.00.
Next, we apply the average total annual return, appreciation plus dividends, of the S&P 500. This number will vary, depending on the range of years, but we selected an annual return of slightly over 9%. (since 1926, that total return has, in fact, averaged 10.16% annually). Additionally, by investing monthly, you are dollar cost averaging, (your dollar buys more when prices are lower), a highly recommended investing method.
Using these numbers, after nine years (starting at age 62) you will have invested about $155,100 into this fund.
Adding in an average annual appreciation of just over 9%, in nine years that amount would grow to about $230,000.00. That’s a nice financial cushion which could make a comfortable retirement more realistic.
Keep this in mind, if you have reached age 71, on average you can expect to see another 17 years (statistics from the Social Security Administration).
There are some Pros and Cons about this plan
PROS
1. Your nest egg is funded from an outside source without digging into your own pockets.
2. Income from your continued employment can also be added or used for any additional taxes that may be due.
3. You can wind up with a large lump sum. It can give you many more retirement options.
4. At age 71, investing that lump sum into something paying 5% would add close to $1,000 monthly to your income. Combine that income with the existing SS check you would then be receiving. That total may be more than if you had waited until age 70 to begin claiming benefits.
5. You may be able to invest this money into a tax-advantaged account.
CONS
1. It does require that you keep working. Under the circumstances, you might be forced to do that anyway.
2. Any taxes have not been considered. Depending on which state you live in, Social Security income may be taxed.
3. Social Security income might affect other income taxes due on the money you earn while working.
4. There is no guarantee of appreciation. However, you could consider alternative investments offering lower volatility. For example, Treasury Bills. Of course, that would affect the return.
5. Waiting until age 70 to claim Social Security would give you larger monthly SS checks (but, no nest egg).