A financial expert says there's a strategy for claiming Social Security early that no one thinks about

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The Social Security strategy works best for retirees with plenty of personal savings.

• Americans can begin claiming reduced Social Security benefits at age 62, whether they're officially retired or not.
• Most financial planners, however, recommend waiting until full retirement age between ages 66 and 67, or later, to take Social Security to get the full benefit.
• In a new article published on The Motley Fool, financial expert Dan Caplinger says there's another Social Security strategy that no one talks about: claiming the reduced benefit at 62 and investing the cash.
• This strategy won't work for everybody, but could be worthwhile for people who have enough savings to live onf or people who retire early.
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Though Americans' reliance on Social Security is diminishing with each generation, it's still the main source of income for most retirees today.

Conventionally we're told to wait as long as possible to claim Social Security. Each year you delay claiming benefits beyond your full retirement age - which is somewhere between ages 66 and 67, depending on when you were born - your benefit increases by up to 8% annually, maxing out at age 70.

Research from United Income shows that that poverty among seniors could be cut in half if every retiree claimed Social Security at the "financially optimal time," which is usually beyond their full retirement age.

But in a new article published on The Motley Fool, financial expert Dan Caplinger says there's a counterintuitive Social Security strategy that no one talks about: claiming the reduced benefit at 62 and investing the cash.

"In general, if you just look at total dollars paid after adjusting for inflation, traditional breakeven analysis concludes that living through your late 70s or early 80s is the typical time at which delaying benefits starts to pay off," he writes. "For those who can invest their benefit checks, however, the time value of money makes a huge difference, because investing early benefit checks provides a longer time horizon for investment growth."

The strategy works best for retirees with plenty of personal savings

Caplinger ran the numbers for a person who claims their reduced Social Security benefit at the earliest possible date, age 62. He assumed the person's full retirement age is 66 and a half, when the benefit would be $1,400, and that they're able to invest the income because they don't need it to live.

Caplinger found that when they put the Social Security money into an ultra-conservative bank certificate of deposit (CD) yielding 2%, they would "break even" between ages 81 and 84. Even though they're getting less money up front, the extra five years of compounding mean that the later Social Security takers won't catch up to the investor until their early 80s, even if they also invest their Social Security benefit once they take it.

When Caplinger bumped up the investment return to 7% - the average annual return in the stock market - there was a marked difference. "Claiming early gives you a sustained lead, and claiming later never catches up," he said. The breakeven point in this scenario, meaning the point at which the investor and the later Social Security taker reach the same total lifetime payout, investment returns included, is over age 100.

However, Caplinger notes, the stock market is fickle and investment returns are often inconsistent year after year, so the strategy isn't foolproof. It won't work for those retirees who do rely on Social Security income, he writes, and may not be as beneficial for people who are still working beyond age 62, as Social Security benefits are taxed and further reduced relative to your annual earnings. Those with a spouse or dependents who plan to claim survivor benefits after death also have other considerations to make.

But for people who have enough personal savings to sustain their lifestyle - and expect to live many years in retirement - claiming Social Security benefits early and investing could be a smart way to grow their nest egg. Early retirees who aren't reporting earned income may benefit as well.

And it could one day be a good strategy for millennials, many of whom are already planning to retire on their own savings. According to a recent Wells Fargo survey, only about 13% of millennials plan to fund their retirement mostly with Social Security, compared to 21% of Gen Xers and 41% of non-retired baby boomers.

Read the full article on The Motley Fool »

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