Q. A co-worker is 65. He is going to start taking Social Security even though he is still working full-time as an engineer, making good money. I am close to being the same, but one year older. I am wondering if I should do the same thing.

His rationale for taking Social Security now is that he can invest it and get a return that is better than the 8 percent a year that Social Security benefits grow. His financial adviser told him he can get him12 percent to 20 percent, even in today’s market, with stocks and funds that return good dividends. Does this ring true? ---H.T., by email from Plano, TX

A. Let me put this gently. Your friend is being led astray by his self-serving adviser. His adviser needs to spend some time studying both the returns that stocks actually earn and the returns managed portfolios of equities actually achieve.

If it were probable that your friend could get a 12 to 20 percent return by investing his Social Security benefits, it would be a reasonable thing to do.

But the adviser has made three major errors. He is ignoring taxes. He isn’t dealing with the perils of high withdrawal rates from investments. And he isn’t dealing with the realities of investment returns. (He has also overlooked the fact that prior to full retirement age, Social Security benefits can be taken back if your earned income exceeds $13,560. Your friend’s full retirement age is 66.)

If your friend were 66, he could get a monthly check from Social Security and invest it. Because he is still working and earning, however, he will probably pay federal income taxes on those benefits.

Here’s a simple example. If your friend were due for a monthly benefit of $1,000 this year, he would collect $12,000 but would probably have to pay income taxes on 85 percent (the maximum) of that amount. In the 25 percent tax bracket that means he’d have only $9,450 to invest after paying income taxes of $2,550.

If he simply defers taking benefits, there is no income and no taxable event--- just an increase in future benefits of about $80 a month, or $960 a year, excluding the inflation adjustment. This means the $9,450 of after-tax income he might have saved would have to provide a reliable, inflation-adjusted annual return of 10 percent to equal deferring Social Security benefits.

Unfortunately, stock values go up and down. Regular withdrawals of 10 percent would exhaust the investment. Your friend can read more about this in the “portfolio survival” section of my website, www.assetbuilder.com. He can also test it for himself at http://fireseeker.com/firecalc.php. When I did it, I found that an investment with 10 percent withdrawals had only a 37 percent chance of survival for a 15-year period. The life expectancy tables say he has a better than 50 percent chance of living at least that long.

Another reality is that very few portfolios come close to achieving long-term returns of 12 to 20 percent.  Using the Morningstar Principia database, for instance, I found that there were about 1,250 funds of all types that invested in domestic equities that also had track records of 15 years or longer.

Of that number, only 165 had 15-year returns of 12 percent or more. So a whopping 87 percent of all domestic equity funds failed to reach the lowest return figure this advisor claims is a slam-dunk! The average return was 9.32 percent.

This group, by the way, included every kind of domestic equity fund--- small-cap, mid-cap, large-cap, growth or value, and sector funds. What it didn’t include is the hundreds of funds that have been merged out of business over the same 15-year period, usually because their returns were dismal. This creates something called “survivor bias.” It works to make the performance of managed portfolios look a lot better than what most people experience. In financial services, funds with embarrassing returns simply disappear.

Am I loading the deck by failing to consider international equity funds? Not at all. Over the same period, there are about 646 international equity funds with 15-year records. Of those, only one had a 15-year annualized return greater than 12 percent. The average return for the group was only 5.39 percent.

Your friend’s adviser is selling what is rarely possible. The adviser will get paid today while he takes risks with your friend’s money for tomorrow. That’s good for him, lousy for your friend.