Why Dave Ramsey’s Stealth Social Security Strategy May Not Work For You

When it comes to retirement, your senior benefits are a major piece of the puzzle. And fewer decisions may have a bigger impact on your retirement income than when to claim your Social Security benefits.

Many experts favor the waiting game when it comes to claiming, with arguments that delaying can significantly increase lifetime income. But personal finance personality Dave Ramsey takes a different stance. His approach challenges traditional retirement-planning assumptions and sparks debate among other financial experts.

While his strategy may make sense for a select group of retirees, critics also argue it relies on too many conditions that many Americans simply don't meet.

Here's a closer look at his approach and why it may not work for you.

What is Dave Ramsey's social security strategy?

The controversial stance of Ramsey? Claim Social Security benefits as early as age 62, on the condition that you invest that money right away. Ramsey proposes investing instead of waiting for a larger monthly benefit check by claiming later. He argues that if retirees can earn strong returns in mutual funds, they can come out ahead compared to delaying claiming.

Rasmey's strategy challenges traditional advice, which instead may encourage workers to wait until full retirement age (or even as late as age 70) before claiming.

Why claiming early and investing works on paper

To his credit, Ramsey's argument isn't without merit. Historically, stock market returns have exceeded the annual increase retirees receive by electing to delay Social Security. So, by his theory, if someone who claims early, invests every dollar, and earns strong returns, they could build a larger nest egg than someone who decides to wait. And for the most disciplined of investors who have a longer time horizon, the math may look compelling.

The strategy assumes you have savings

The first fault in Ramey's design? This strategy assumes you have solid savings, meaning it's best for retirees who are already somewhat financially secure. If you have a large retirement portfolio, you can afford to leave invested money untouched during market fluctuations instead of the other option of selling assets at a loss.

However, many retirees actually enter retirement with limited savings, which means it's harder to take on additional investment risk with a key source of income.

Most retirees depend on Social Security income

A fact is that for many Americans, Social Security isn't extra money available for investing. For many, Social Security amounts to about 49% of total family income. It is instead used to help cover housing, food, healthcare, and any other essential expenses.

Retirees who depend on their Social Security to make ends meet don't have the flexibility to invest the payments consistently. So, in those situations, this strategy isn't practical in some of Ramsey's hypothetical examples.

Market returns aren't guaranteed

The biggest key here is that market returns are never guaranteed, even if the market historically performs well. And the success of Ramsey's approach depends heavily on how the market performs. Future results are uncertain when it comes to market returns.

Retirees who experience a major market decline shortly after claiming benefits may lose more money than expected. And unlike Social Security, investment returns come with a risk, and poor timing can affect that outcome.

Delaying Social Security offers a guaranteed return

An advantage of waiting is certainty. Social Security benefits grow every year a retiree chooses to delay claiming the benefit beyond full retirement age (up to age 70). Delaying past full retirement age grows benefits by a guaranteed 8% per year until 70.

This increase is guaranteed and lasts for life. There isn't a mutual fund, stock portfolio, or market strategy that can promise the same outcome. So, for retirees seeking a predictable income, this growth can be tough to match.

The overlooked survivor benefit risk for married couples

How early claiming can affect surviving spouses is often overlooked. When the higher-earning spouse claims benefits early, the survivor benefit available to the living spouse is permanently reduced. By delaying, the higher-earning spouse can increase the amount a surviving spouse may receive.

Overlooking this factor can have a significant financial consequence for couples when planning for the long term.

Bottom line

Dave Ramsey's Social Security strategy is not necessarily wrong. But it is designed for a narrower group of retirees, something many people may not realize. It's targeted towards those with substantial savings, low withdrawal needs, and decades of investing experience. This is amongst other considerations, like surviving-spouse benefit and your debt load.

Running projections with a financial planner (or a Social Security calculator) can help plan your retirement and determine the potential upsides that justify the added risk of investing. For those retirees who rely heavily on Social Security to cover monthly expenses, delaying benefits may provide more value than hoping for higher investment returns.

Beyond the larger monthly check, waiting can also create a stronger hedge when considering longevity. There's a possibility of living longer than expected and needing a guaranteed income well into your 80s or 90s. And, in many cases, this protection can be just as important as maximizing your returns.

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Author Details

Chris Lewis, CEPF

Chris Lewis has spent his career turning data into answers. As Director of Digital PR at FinanceBuzz and a Certified Educator in Personal Finance, he oversees the data journalism and media relations teams, digging into the personal finance topics that shape Americans' lives at every stage, from Social Security and retirement income to 401(k) strategies, jobs, and real estate.