Timing Social Security Benefits: Strategies for Affluent Retirees

As a fee-only financial advisor in Connecticut, one of the most frequent questions I receive from people I meet is: Should I claim my Social Security benefit early or wait to maximize the monthly benefit? It’s a tricky question because every affluent retiree has different financial circumstances, needs, and goals. The work history of both spouses may also impact the answer.

Unfortunately, many retirees aren’t ready to make this important decision, and the Social Security Administration (SSA) has no incentive to help you determine the best time for one or both spouses to start collecting benefits.

In this article, we’ll explore this topic in more detail and discuss various strategies that affluent retirees use to leverage their Social Security benefits, especially when their retirements could last 30 or more years.

Understanding The Eligibility Requirements of Social Security

You can begin taking Social Security benefits as early as age 62. However, this is considered “early retirement” and results in a permanent reduction of benefits. The reduction can be as much as 25% to 30% compared to what you would receive if you waited until your full retirement age (FRA).

Your full retirement age depends on the year you were born. For most people today, FRA is 66 or 67. If you wait until your full retirement age, you can collect 100% of your entitled benefits.

Additionally, you can delay taking Social Security beyond your full retirement age, up to age 70. Each year you wait, your benefits increase by a certain percentage, which varies depending on your birth year, but it’s typically around 8% annually. You might consider this a risk-free rate of return.

Here’s an example of how Social Security benefits could vary depending on when you start collecting them:

• At age 62: If you begin taking benefits at the earliest possible age (62), your benefits will be reduced by about 30%. In this case, you would receive approximately $1,400 per month.
• At age 65: If you start taking benefits at age 65, your monthly benefit will be reduced but less than at age 62. You would receive around $1,733 per month (this reduction is about 13%).
• At age 67 (Full Retirement Age): If you wait until your full retirement age (67), you will receive your full benefit of $2,000 per month.
• At age 70: If you delay taking Social Security until age 70, you can benefit from delayed retirement credits, increasing your monthly benefit by about 8% per year after your full retirement age. In this case, you would receive approximately $2,480 monthly (24% more than the full retirement age benefit).

These percentages and amounts are based on current Social Security rules and general estimates. The exact amounts will vary depending on your earnings history and other factors.

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Tax Implications Associated with Social Security Benefits

Taxes can play a significant role in determining how much you ultimately receive from your Social Security benefits. Factors such as your total income, filing status, and the timing of when you start taking benefits can all influence the tax treatment of your Social Security income. 

Consider working with a fee-only financial advisor in New Haven, CT, or a fiduciary financial advisor in Woodbridge, CT, who can help you navigate these complexities and ensure that your Social Security strategy aligns with your broader retirement and tax planning goals.

Here’s a breakdown of the key tax considerations:

• Did you know that up to 85% of your Social Security benefits may be subject to federal income taxes, depending on your combined income, calculated as your adjusted gross income (AGI) plus any nontaxable interest and half of your Social Security benefits? Here’s how the thresholds work:
• Single Filers: If your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxable. If your combined income exceeds $34,000, up to 85% of your benefits may be taxable.
• Joint Filers: If your combined income is between $32,000 and $44,000, up to 50% of your benefits may be taxable. If your combined income exceeds $44,000, up to 85% of your benefits may be taxable.

As a high-income earner, you may be more likely to face taxation on your Social Security benefits, particularly if you have substantial income from other sources, such as a pension plan, IRA, or personal savings accounts.

• In addition to federal taxes, some states also tax Social Security benefits. While most states exempt Social Security from taxation, a few states, such as Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia, may tax benefits to some extent. Each state has different rules, so it’s essential to understand your state’s tax treatment of Social Security income.
• If your income exceeds certain thresholds, your Medicare Part B and Part D premiums may increase due to the Income-Related Monthly Adjustment Amount (IRMAA). The higher your income, the more you’ll pay for Medicare. Social Security benefits are included in your modified adjusted gross income (MAGI) calculation, so taking Social Security benefits can push you into a higher income bracket, resulting in higher Medicare premiums.

For example, in 2024, if your MAGI is over $103,000 for single filers or $206,000 for joint filers, you’ll pay higher premiums for Medicare Part B and Part D. This can be a significant consideration for higher-net-worth retirees managing both income and healthcare costs.

• At age 73 (or 75 for those born after 1960), you must begin taking required minimum distributions (RMDs) from traditional IRAs, 401(k)s, and other qualified retirement plans. These distributions are taxed as ordinary income and could push you into a higher tax bracket, affecting the taxation of your Social Security benefits.

Coordinating Social Security timing with RMDs is a crucial strategy for higher-net-worth retirees. Some may start Social Security earlier to lower the taxable portion of their retirement account distributions later. In contrast, others might delay Social Security and withdraw from taxable accounts first to take advantage of lower tax rates before RMDs begin.

• Converting a portion of your traditional IRA or 401(k) into a Roth IRA before taking Social Security can help manage your tax burden. Roth IRA distributions are tax-free and don’t count as income when determining how much of your Social Security benefits are taxable. 

By doing conversions in the years leading up to taking Social Security, you might reduce your taxable income in future years, potentially lowering the taxability of your Social Security benefits and helping you avoid higher Medicare premiums.

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Why You Should Consider Working with an AIF® Financial Advisor

If you’re nearing retirement and haven’t yet developed a comprehensive Social Security strategy, it might be time to consider switching financial advisors. A financial advisor specializing in retirement planning with an Accredited Investment Fiduciary (AIF®) designation can help you navigate complex financial alternatives, including defensive management strategies to protect your wealth from market volatility, unnecessary taxes, and inflation. 

A high-quality financial advisor should focus on ensuring your investments are aligned with your long-term goals, utilizing tactics such as diversification, risk management, and proactive decision-making based on economic events. These can safeguard your retirement plan against unexpected downturns and help develop a more secure financial future.

If you’re nearing retirement and haven’t yet developed a comprehensive Social Security strategy, it might be time to consider switching financial advisors. Connect with us to learn more about our retirement planning services.