Date: May 13, 2024

Tactical Social Security Planning for High Net-Worth Individuals

As you approach retirement, understanding the impact of Social Security becomes a significant piece of an already complex puzzle known as retirement planning. For affluent individuals, the challenge isn’t just about choosing when to start benefits but also knowing how those choices impact your taxes and retirement income. 

You might be wondering: 

  • When is the best time to claim benefits? 
  • How will this affect my taxable income? 
  • Should my spouse and I coordinate our claims? 
  • Are there tactical planning tips for Social Security I should consider?

Here at Heritage Capital LLC, we understand that high-net-worth individuals like you have unique financial considerations. Our team of fiduciary financial advisors has been helping people retire with confidence for over 30 years, and we’re committed to helping you navigate these complexities.

This article discusses the timing of taking Social Security benefits, strategies tailored for affluent individuals, and the role of a fee-only fiduciary financial advisor in helping to improve your retirement plan.

Understanding the Basics of Social Security

Social Security, introduced in 1935 as part of the New Deal, was designed to ensure financial security for America’s older citizens. Originally a retirement program, it now also supports disabled people and survivors of deceased workers. 

Benefits are funded by payroll taxes under the FICA. Social Security benefits are based on the worker’s highest 35 years of earnings rather than their wealth.

Taxation of Social Security benefits was introduced in 1983, and individuals or couples earning over specific income levels could have up to 85% of their benefits taxed. This highlights the need for strategic retirement planning for high-net-worth individuals.

While Social Security may not be your primary source of income, it can still contribute to your overall financial situation. A crucial decision point is when to take It.

The Impact of Timing on Social Security Benefits

Full Retirement Age (FRA) is the age at which you are entitled to receive your complete Social Security benefit. This age varies by birth year; for those born in 1960 or later, it is 67. 

Benefits can be claimed as early as 62 or as late as age 70, offering both pros and cons depending on your retirement strategy. Claiming benefits before your FRA results in a reduction, with monthly payments permanently lowered by up to 30% if claimed at age 62. 

Conversely, delaying your claim beyond your FRA can significantly increase your benefits, adding an 8% increase per year up to age 70. This flexibility allows you to optimize your benefits based on your financial and tax circumstances.

For example, claiming Social Security at 62 will provide income sooner but permanently reduce your monthly benefits. This could also potentially increase your taxable income, pushing you into a higher tax bracket. However, waiting until age 70 increases your monthly benefits and might lower your tax burden during the years you delay it.

The “when to take Social Security” decision is more detailed for affluent retirees. 

Heritage Capital’s founder and AIF® advisor, Paul Schatz, can help you explore strategies that might be more suitable for your financial situation. These high-net-worth retirement planning strategies can help you get the most out of your benefits while considering your other sources of retirement income.

Integration of Social Security With Other Retirement Income

A well-crafted retirement plan should integrate Social Security with all your other income sources. This holistic approach helps create a predictable and sustainable cash flow throughout retirement.

Here’s where a fee-only financial advisor in New Haven, CT, becomes invaluable. An experienced advisor can assist you in:

Cash flow analysis: Understanding your current and projected income streams, including Social Security, pensions, and investment income.

Tax implications: Navigating your specific tax situation associated with your income, retirement accounts, and Required Minimum Distributions. The goal is to help you minimize your overall tax burden and maximize your after-tax income.

Risk management: Developing a strategy considering potential risks like inflation, market fluctuations, and unexpected healthcare costs. Social Security could provide a stable base, allowing your investments to handle potential market volatility. 

Coordination with your spouse: If you are married, it’s essential to coordinate your benefits with your spouse. A fiduciary financial advisor can help evaluate the best options for each of you.

Tactics for Maximizing Social Security Benefits

While the basic principles of early vs. delayed retirement apply to everyone, affluent retirees have additional strategies to consider. Here are a couple of options:

Restricted application (For eligible spouses): This strategy is particularly beneficial for couples where one spouse has a significantly higher earning history. If you were born before January 1, 1954, you might still qualify for a “restricted application,” but because that cohort is now above 70, the usefulness is extremely limited. This application allows you to claim spousal benefits based on your partner’s earnings while deferring your benefits. By delaying your claim, your benefits can accrue delayed retirement credits—an 8% annual increase—until you reach age 70. This maximizes your benefits while still providing a stream of spousal benefits.

Maximize the higher earner’s benefit: Even if you don’t qualify for a restricted application, coordinating claiming strategies as a couple can still be highly advantageous. Focusing on maximizing the benefits of the higher earner—likely to have a larger benefit due to higher lifetime earnings—ensures that the surviving spouse receives a more substantial spousal benefit in the future. This strategy can significantly enhance your overall household retirement income.

The best tactics depend on your specific circumstances. Factors like your marital status, health expectations, and existing income sources all play a role. Our advisors can help you weigh these factors and personalize a Social Security claiming strategy that aligns with your retirement goals.

The Role of a Fee-Only Financial Advisor in Retirement Planning

Not all financial advisors are the same. Many firms prioritize their success over that of their clients. Opting for a fee-only financial advisor offers several benefits when planning your retirement. Here’s how Heritage Capital can benefit you:

Fiduciary duty: In addition to hands-on investment management, we function as financial fiduciaries, adhering to the highest ethical standards in the financial services industry. This assurance means you can rely on us for impartial advice that prioritizes your best interests. It’s crucial to recognize that not all financial advisors uphold this elevated ethical standard.

Transparency: As a fee-only fiduciary firm, we charge a transparent fee based on the assets under management. This eliminates any potential conflicts of interest that might arise with commission-based advisors. 

Experience with complexities: High-net-worth individuals often have intricate financial situations. Heritage’s fee-only financial fiduciary advisors possess the knowledge and expertise to navigate these complexities.

Get To Know Heritage Capital

While determining when to claim Social Security is important, it’s just one aspect of your financial plan. In the years leading up to retirement, making the right decisions from the beginning is very important. Partnering with a competent fee-only financial advisor is essential for managing high-net-worth retirement planning strategies. 

At Heritage Capital LLC, our team is dedicated to helping affluent individuals in Connecticut pursue a fulfilling and secure retirement. We pride ourselves on offering personalized, ethical guidance to align your Social Security strategy with your unique financial goals.

Reach out to us today for a free consultation. Let’s discuss your retirement plans and how we can help you and your family.

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Paul Schatz, President, Heritage Capital