For many Americans, the decision of when to claim Social Security is based on when they need the money. But for those who have built significant wealth, the calculation is a bit more complex. The question is no longer one of necessity, but of strategy—how to optimize your benefits to best serve your overall financial plan.
Let’s explore some factors to guide your timing decision and the specific scenarios where conventional wisdom might not apply.
Tips to Guide Your Timing Decision: Four Factors to Analyze
To develop a thoughtful timing strategy, you can ask the questions and analyze a few areas:
1. Use Your Portfolio as an Income Bridge
For those who don’t need Social Security for immediate living expenses, it can be helpful to view the decision through an investment lens. Using your portfolio to fund your lifestyle between age 62 and your Full Retirement Age (FRA), or even up to age 70 can allow your future Social Security benefit to grow significantly. For each year you delay claiming past your FRA up to age 70, your future benefit amount increases by a credit of approximately 8%. This increase is a feature of the Social Security program, offering a level of predictable growth that is difficult to replicate in financial markets. Delaying can be a powerful strategy to create a larger, government-backed income floor for your later years, potentially reducing the need to draw down your investment portfolio.
2. Understand the Potential Tax Impact
For high-income earners, Social Security benefits often become a factor in your tax equation. Depending on your provisional income, up to 85% of your Social Security benefit could be subject to federal income tax. This additional income can also impact the taxes you pay on long-term capital gains and dividends. Timing your benefits can be a powerful tax-planning tool. For example, some individuals may find it advantageous to execute Roth conversions in the years between retiring and claiming Social Security. Carefully managing your income streams can potentially reduce your lifetime tax liability.
3. Leverage Social Security as Longevity Insurance
While no one can predict their lifespan, planning for a long retirement is a cornerstone of a sound financial strategy. A maximized Social Security benefit is one of the most effective tools for mitigating the financial risk of a long life. While a breakeven analysis can be a useful data point, the value for many is in the peace of mind it provides. Receiving a higher, inflation-adjusted payment in your 80s and 90s provides a reliable income floor, helping to preserve your other assets for legacy goals or unforeseen expenses.
4. Consider Your Spousal & Legacy Goals
If married, your claiming decision is one you make for your spouse. Under current rules, when one spouse passes away, the surviving spouse is entitled to receive the higher of the two individuals’ benefits. By having the higher-earning spouse delay their claim until age 70, you are effectively planning for the surviving spouse’s future. This can be a profound part of your legacy, providing a larger, lifelong, inflation-adjusted income stream to your partner.
When Delaying Might Not Make Sense: Three Scenarios to Consider
While delaying Social Security can be a powerful strategy, it might not be the right choice for everyone. Here are some situations where claiming earlier could be a more prudent decision.
1. Assess Your Health and Life Expectancy
This is the most personal factor. If your health status or family history suggests a shorter than-average life expectancy, the financial logic may shift in favor of claiming benefits sooner to increase your potential lifetime payout.
2. Fund a Specific Life Goal
You may have a significant, time-sensitive goal that you wish to fund in your early 60s, such as launching a charitable foundation or making a significant family gift. Claiming
Social Security could provide an income stream to help fund this goal without needing to sell a highly appreciated asset and potentially trigger a large tax event.
3. Navigate Complex Spousal Situations
There are certain financial planning scenarios, such as a large age difference between spouses or a non-working spouse, where a coordinated claiming strategy might involve one spouse taking benefits earlier. These situations require careful analysis to weigh the trade-offs between various spousal and survivor benefit options.
A Decision Beyond the Numbers
As you can see, the Social Security timing decision is a perfect example of why financial planning isn’t just about numbers. It’s a deeply personal choice that must be weighed against your comprehensive financial goals.
Optimizing your Social Security benefits can benefit from a personalized approach that integrates directly with our Net Worthwhile® philosophy, which seeks to help you grow the impact of your money, protect all you’ve worked for, give where it matters most, and live the life you want.
If you are ready to explore what this strategic decision could mean for your retirement and legacy, contact a SignatureFD advisor to begin the conversation.
