Social Security Optimization: How Can You Maximize this Benefit as a High Net Worth Individual?

Chad Holland |

There's significant information out there about simple Social Security filing strategies. While these approaches can work for those with low or moderate incomes, things aren't so clear-cut if you're a high net worth or high income individual. Instead, opting for basic strategies can even potentially backfire, costing you or your heirs more in the long run. Let's dive into the details of Social Security optimization and how to make this benefit work best for you.

Social Security Basics

First, let's take a moment to review the basics. Social Security provides benefits to anyone who has paid into the system with at least 10 years of earnings. Generally, you are allowed to claim benefits as early as age 62. However, the earlier you take benefits, the less you'll receive each month. If you wait to file, you can increase the amount you get about 8% per year. You will receive the highest possible monthly benefit by using a claiming age of 70. After that, there's no additional increase. As you can see, unless you really need the money earlier, waiting to file is an easy way to maximize your Social Security benefits, since you will receive the increased amount for the remainder of your lifetime.

Think of Social Security As an Annuity

The reality is that Social Security cannot be your sole source of retirement savings since it is not enough to live on. However, that doesn't necessarily make it a trivial part of your financial planning. Social Security provides a fixed payment that will last your entire lifetime, which helps you deal with the risk of living longer than you expected. And inflation-adjusted annuities, even smaller ones, are very helpful to provide a fixed income source that keeps up with inflation. So even with a high income, this monthly Social Security benefit can be a useful source of additional retirement income. 

Why Analyzing Social Security Benefit Scenarios is Important

For those with significant savings, the strategy around Social Security claiming takes on heightened importance. Strategic claiming can potentially add to your wealth, impacting both your income and legacy goals. So, planning tools should be used to analyze different Social Security benefit claiming strategies. Or, if you're doing this on your own, you can go to the Social Security Administration website, which provides some resources for forecasting your benefit based on various inputs. There, you can see what your benefit amount (or survivor benefit) will be based on different inputs and factors. (View the Social Security Administration's online Social Security calculator.)

The Impact of Waiting to Claim Social Security Benefits

Delayed claiming until age 70 can maximize Social Security benefits, as every year you wait to claim increases your benefits by approximately 8%. This approach also gives you an opportunity to manage your taxes better since your income will be lower by that amount during those delayed benefit years. And as long as you don't need the money, this strategy can help you maximize your benefits. 

However, this approach can also impact your financial legacy since you will be using your own savings instead of Social Security in those years until you reach age 70. If the stock market is down during those years, it might impact your beneficiaries.

What about Claiming Early?

While claiming early might seem like you are missing an opportunity to maximize lifetime Social Security benefits, it might make sense based on your estate planning goals. If you opt to file for Social Security early, this strategy can be beneficial for your estate in the short term. By drawing on benefits earlier, you reduce the need to withdraw from your personal savings, thereby preserving your estate's value during the initial years of retirement. This approach can be advantageous if you're interested in maximizing your financial legacy for your beneficiaries.

However, if your focus is more on maximizing your income in the later stages of retirement, delaying your Social Security benefits until age 70 may be worth considering. While this means you'll rely more heavily on your savings in the short term, potentially reducing your estate's value initially, it also leads to higher Social Security payments. Over time, this can contribute to a more substantial estate, especially as these increased payments continue into your later years.

The impact on estate planning is evident when comparing net worth projections at different ages based on when you start taking Social Security. Early filing might show a higher estate value initially, which might be important if you plan on leaving a legacy soon after retirement. In contrast, late filing can lead to a more significant estate value in the long run, which can be beneficial if your goal is to maximize wealth transfer later in life.

Optimizing Social Security Claiming with Your Spouse

It's also important to understand how spousal benefits work, as this can also present opportunities to maximize benefits. A spouse can be eligible for up to 50% of their partner's full retirement age benefit, which is especially helpful if one spouse has a lower earnings record.

Coordinating when each spouse claims their benefits can be key to maximizing your overall lifetime benefit. For instance, if there's an age difference, the older spouse might decide to receive benefits earlier, providing income while the younger spouse's benefits continue to grow.

Another critical aspect is the maximization of survivor benefits. In the event of one spouse's passing, the surviving spouse is entitled to the higher of the two Social Security benefits. Therefore, often it makes sense for the higher-earning spouse to delay claiming their benefits to ensure a larger survivor benefit.

Health and life expectancy are also vital considerations. If health issues could potentially reduce life expectancy, claiming benefits earlier may be more beneficial.

FREQUENTLY ASKED QUESTIONS

Are Social Security Benefits Inflation-Adjusted?

Yes, Social Security benefits are inflation-adjusted. This adjustment, known as the Cost-of-Living Adjustment (COLA), is designed to help Social Security benefits keep pace with inflation. Each year, the Social Security Administration assesses the rate of inflation using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). If there's an increase in the CPI-W, Social Security benefits are adjusted upwards starting in January of the following year to reflect this change. This inflation adjustment is what makes Social Security an especially useful addition to your retirement portfolio, as it can help you keep pace with future price increases in retirement.

Is there a Benefit to Waiting Past Age 70 to File?

No, there is no benefit to delay taking benefits past age 70. Once you reach 70, your Social Security benefits reach their maximum amount due to delayed retirement credits, and there are no additional increases for delaying further. Therefore, it's generally advisable to choose to claim at age 70, even if you continue to work or don't need the income immediately. By starting your benefits at 70, you ensure that you are receiving the maximum possible amount from Social Security. Waiting beyond this age means you would be missing out on payments, so you are losing out on cumulative benefits. 

Is Social Security Taxable Along with Other Parts of My Retirement Income?

Yes, Social Security can be taxable along with other parts of your retirement income, depending on your overall income level. If Social Security were to be your only source of income, your benefits may not be subject to federal income tax. However, if you have other sources of income, such as earnings from a job or business, withdrawals from individual retirement accounts like IRAs or employer accounts such as 401(k)s, or interest and dividends from investments, a portion of your Social Security benefits may be taxable.

If your overall combined income exceeds certain thresholds, up to 50% or even 85% of your Social Security benefits may be subject to federal income tax. The thresholds vary based on your filing status (single, married filing jointly, etc.).

It's also important to note that some states tax Social Security benefits received as well, while others do not. The taxation of Social Security benefits can be complex, so it may be beneficial to consult with your tax professional.

How is the Specific Amount of the Social Security Benefit Determined?

The amount of your Social Security benefits are based primarily on two things: your earnings during your working years and your Social Security claiming age. Their system looks at your Social Security earnings record, which is your highest 35 years of earnings. You can view these earnings by downloading a Social Security statement from the administration's website. Then, if you take Social Security before your full retirement age (which depends on when you were born), your benefit is lower. If you wait until after your full retirement age, up to age 70, your benefit increases.

How Do Work Earnings After Full Retirement Age Affect Social Security Benefits?

In today's world, retirement is being redefined. What if you want to start a business or do some consulting after retiring from your current full-time profession? There's good news: after you reach your full retirement age, you can work and earn as much as you want without it reducing your Social Security benefits. Before this age, earning too much could lower your benefits, but after, there's no penalty no matter how much you earn. Plus, if you keep working, you might even increase your future Social Security benefits, especially if these later years are among your highest earning years. So some retirees today are using that strategy to maximize their benefits, if they are keen to continue working.

Can Social Security Benefits Impact Medicare Premiums?

Yes, your Social Security benefits can affect your Medicare premiums by increasing your income. If you have a higher income, you might have to pay more for your Medicare Part B, which covers doctor visits and outpatient care, as well as Part D. which covers prescriptions. This is because of something called the Income-Related Monthly Adjustment Amount (IRMAA), which increases premiums for people with higher incomes.

Your Medicare premiums are based on your income from two years ago, but then remain elevated. So that's another factor to take into account in retirement planning.

Are There Special Considerations for Social Security Planning for Divorced Individuals?

Yes, there are other considerations if you are divorced. If your marriage lasted at least 10 years, you might be eligible for spousal benefits based on your ex-spouse's work record. This is relevant if your ex-spouse's Social Security retirement benefits are expected to be higher than yours.

To qualify, you must be at least 62 years old and currently unmarried. If your ex-spouse has not yet applied for their benefits but is eligible, you can still receive benefits based on their record if you have been divorced for at least two years.

Additionally, if your ex-spouse passes away, you may be eligible for survivor benefits. These benefits are available if you are at least 60 years old (or 50 if you are disabled) and the marriage lasted at least 10 years. The amount you receive as a divorced spouse will not affect the benefit amounts for other survivors of your ex-spouse.

Understanding these rules can be crucial for divorced individuals in maximizing their Social Security income and ensuring financial stability in retirement.

How Does Social Security Fit into a High Net Worth Individual's Overall Retirement Plan?

For high net worth individuals, Social Security may be a smaller part of the retirement plan, but it still offers several benefits:

  1. Steady Income: Social Security provides a consistent, inflation-adjusted source of retirement income, adding stability to a retirement plan that may include more variable income sources.

  2. Risk Management: It helps manage risks like outliving other assets or dealing with market ups and downs, offering a hedge. 

  3. Estate Planning: Using Social Security for regular expenses can help preserve investment portfolios for future needs or for leaving a legacy.
  4. Diversification: It adds another layer of income diversity, which is crucial for financial security in retirement.

The Bottom Line

As you can see, Social Security optimization can be more complex than it seems at face value. That's why at Holland Capital Management, we include Social Security planning as part of our standard scope of service. Whether it's in your best interest to claim Social Security benefits early, or to wait until age 70, we'll help you determine the best way to maximize this benefit so you can make the most of your resources.