Saying someone is wealthy is like saying someone is happy. It’s subjective enough that I hesitated to even write this article. However, there are a few common themes that come along with wealth that impact when it may make sense to claim Social Security. For purposes of this article, we’ll say that “wealthy” means you have amassed at least $5 million.
In my experience of meeting with hundreds of wealthy folks every year for the last 15 years, there are some shared financial traits:
- They have shifted more toward optimizing their financial life over the fear of running out of money. (Unfortunately, that latter fear never totally goes away.)
- Typically, their non-retirement accounts are bigger than their retirement accounts. This is often for one of the following reasons: an inheritance, significant income during their working years, a business or asset sale.
- Taxes play an increasingly important role in their financial life, basically because of the two points above.
OK, so to answer the question this article started with: Should you delay claiming Social Security because you’re wealthy? In most cases, yes. Here’s why:
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1. You don’t need the money.
Let’s start with fundamental need. If, as stated above, you have amassed significant non-retirement assets, you have liquidity and don’t necessarily need the money today.
Social Security will pay you handsomely for every month you delay beyond your full retirement age. These monthly increases add up to 8% per year, which is hard to match on a guaranteed basis.
2. You want to take advantage of the 'tax valley.'
Throughout your working years, you’re mostly summiting a tax peak. As your income increases, so too does your effective tax rate. Then comes retirement, and you can fall off a tax cliff and remain in a tax valley until you start to peak again. What causes that peak if you’re not working? Social Security income and required minimum distributions (RMDs) often have a significant impact on your tax rates.
Delaying Social Security until 70 can prolong the tax valley and may allow you to take advantage of those low rates. We are often helping clients recognize capital gains at lower rates and do Roth conversions in the period between retirement and 70.
3. You want to focus on legacy planning.
I would argue that since the SECURE Act of 2020, the Roth IRA has become the most tax-efficient way to leave a legacy to children. Life insurance agents would argue I’m wrong. They are conflicted. Like life insurance, Roth IRAs are left tax-free. Unlike life insurance, they maintain tax deferral typically for a period of 10 years beyond the decedent’s death.
Delaying Social Security allows you to convert traditional retirement accounts into Roth accounts while you’re in a lower tax bracket. Those accounts can then be invested aggressively if they are for legacy purposes.
In the early years of my career, we relied on a slew of different software and Excel spreadsheets to come up with a Social Security claiming strategy that made sense for our clients. The challenge is that the Social Security maximizers didn’t factor in goals or taxes. Now, the best planning software can pretty effectively tie all these things together and come up with an optimal solution. You can try a free version of our software.
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