You’ve heard and read it many times.
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If at all possible, put off claiming Social Security until your full retirement age so you can reap that full benefit amount. Even better, wait until you’re 70 because your benefit can grow an extra 8 percent for every year you put off the day you begin drawing those checks.
And, unless there are dire circumstances, absolutely don’t take Social Security when you are 62 because when you claim it at that earliest-allowed age you’ll receive a much smaller check.
Great advice. Except when it’s not.
In reality, this one-size-fits-all advice may not be appropriate for everyone – and that can be especially true for the wealthy. Because there are cases where claiming Social Security when you are 62 is the best path for high-net-worth individuals.
Let me illustrate the concept by giving you a real-life example that my firm encountered. We counseled a family where the husband was retiring at age 62. With the paycheck no longer coming in, they were both about to find themselves in the lowest tax bracket they had been in since their first jobs: the 10 percent bracket.
The issue that immediately came to light is they, like many Americans, will look to draw money from their IRA and 401(k) accounts in retirement. These are generally the most significant accounts in terms of amounts saved through the working years. If this family didn’t turn on Social Security at age 62, they would need to pull heavily from these pre-tax retirement accounts.
Based on the monthly distribution rate needed to maintain their budget, those dollars — taxed at current income tax rates — would immediately put them into a higher tax bracket (potentially the 22 percent bracket under 2018 tax rates). But if they opted to take their Social Security payments at age 62, the monthly distribution amounts needed from their retirement savings accounts would be substantially smaller.
As I’ll demonstrate, this couple’s story shows how draining your retirement accounts early in retirement can result in lost opportunities for compounded growth of assets over a 20-to 30-year retirement. If they were to take their Social Security at age 62 — while in a 10 percent tax bracket from age 62 to 70 — the amount of tax they would pay on those Social Security benefits would be minimal, possibly even zero.
There are cases where our families who have done a great job of saving across many accounts with true tax diversification in their portfolio will pay no tax on their Social Security benefits for a good majority of their retirement (based on 2018 Social Security Base Amount limits, which have been in effect since 1983).
Now, if this family were to delay taking Social Security payments until their full retirement age of 66, it’s estimated they would be deferring nearly $146,000 in Social Security payments over that period. They would be forced to pull money from their retirement accounts to live on, paying a projected $51,372 in federal taxes from age 62 to 66.
Instead, if they elected to take their Social Security at age 62 at a 10 percent bracket, the tax savings on that $146,000 would be substantial. By drawing early and minimizing taxes on retirement and brokerage funds, the family would owe $9,768 in taxes during the same period. That’s a savings of $41,604 in taxes at the beginning of their retirement career.
To take it a step further, we reviewed what their retirement account balances would be when comparing the same withdrawal rate, using the same rate of return on their assets (a portfolio weighted average return of 4.47 percent). The estimated numbers* spoke for themselves.
$122,000 more at age 65: If they were to take Social Security at age 62 versus age 66, their combined account balances at age 65 are estimated at $1.37 million. If they were to defer Social Security until 66, their combined account balances at age 65 are estimated at $1.248 million. That’s a $122,000 difference: $122,000 more in their bank account at age 65 if they started taking Social Security earlier.
$144,000 more at age 75: We reviewed further, to age 75. By taking Social Security at age 62, their overall account balance would have totaled an estimated $1.53 million at 75. If they waited to take benefits until 66, their account balance at 75 came in at $1.386 million. That’s $144,000 more in their bank account by taking Social Security earlier.
$100,000 more at age 85: By taking Social Security at the early age of 62, their account balance at age 85 would total $1.39 million, versus $1.29 million were they to take Social Security later, at age 66. That’s a $100,000 difference.
$44,000 more at age 95: Finally, we looked at a 30-year horizon to age 95. If they were to take their Social Security at age 62, their balance would total about $1.14 million at age 95, whereas if they were to take Social Security at age 66, the balance would total $1.096 million at age 95. That’s a difference of $44,000, still in the positive.
If you’re like me, I want $100,000+ more in my retirement accounts in my early 60s through my mid-70s, when I’m still active and able to travel and enjoy the fruits of my labor. Ultimately, claiming at age 62 based on their current expenses potentially nets them $44,000 more in late life.
As you can see, Social Security is a complicated topic. Be informed. Talk to a financial adviser — a retirement specialist — about all the rules and strategies that apply to claiming your benefits. You also may wish to include a tax professional and/or an estate attorney in the conversation.
Just don’t ignore this important retirement issue. Decisions about when to file and how to integrate Social Security into every aspect of your financial plan shouldn’t be treated as trivial or an afterthought.
You’ve worked for years paying into the system — it’s time these dollars start working for you.
* These figures take into account federal taxes using the standard deduction, taxes on Social Security, RMDs, COLAs and average inflation.
Chris Heerlein, author of Money Won’t Buy Happiness – But Time to Find It, is a Investment Adviser Representative and partner at REAP Financial LLC. He hosts the “Retire Ready” TV and radio shows in Austin, Texas, and has been featured in national media outlets such as Fortune,Bloomberg Businessweek, and Money magazines. Heerlein also is an ongoing contributor to the financial publication Kiplinger.