Many life decisions that used to be simple are now more complicated than ever. Take claiming your Social Security benefits, for example. I was sitting down with a couple just the other day, and they were blown away by the number of claiming options—there are now more than 80 ways for a married couple to claim their Social Security benefits, making the process of just starting retirement more complex.
With longer life expectancies, numerous Social Security claiming strategies, stock market volatility, employer insolvency, rising healthcare costs, and many other factors, retiring is more complicated than ever before. One of the best tactics you can employ when it comes to planning your retirement is to work with an experienced executive financial advisor.
A trusted advisor can provide you with the facts about claiming Social Security benefits, account for all of the factors that affect your situation, and help you develop and implement an effective Social Security claiming strategy. Once you’ve done this, your investment strategy, healthcare planning, and other retirement plans can be developed to complement the strategy used for claiming your Social Security benefits.
Social Security Claiming Myths
Before we discuss how to choose your Social Security claiming strategy, let’s first take a minute to debunk a few myths about these benefits.
You may find yourself out on the golf course or the lake at some point, chatting with another pre-retiree, when the conversation turns to claiming Social Security benefits. Before long, you are getting advice about whether you solicit them or not. While there is no harm in talking shop with someone preparing to make the same life decisions as you, it is important to keep in mind that there are many misconceptions and myths surrounding Social Security. Some of these misconceptions include:
- Your ex-spouse can affect your Social Security benefits. This is a common misconception I hear, but it happens to be false. It is true that your ex-spouse can claim a payment that is 50% of your Social Security benefit amount (if they don’t remarry). If you have an ex-spouse and their payment amount is less than 50% of yours, it would make sense for them to opt for this claiming strategy. However, this does not affect your own Social Security benefit amount in any way. Your payment amount is the same regardless. In fact, your ex-spouse doesn’t even need to bother you when they file. They simply have to prove they were married to you and that they are now divorced from you, and the Social Security benefits office will handle the rest.
- If you claim early, you get an increase at full retirement age. Unfortunately, this is not the case. Once you have made your irrevocable Social Security benefits claim, you cannot alter your payment amount. You can, however, opt to have those benefits put on hold for a number of years, up to age 70, if you no longer have a need for the income and want to increase your payout. In general, for every year you withhold your benefits, your payout amount should increase by around 8%.
- Your benefit amount is based on your income prior to age 66. Your Social Security benefit amount is based on the highest 35 years of your income, which do not have to be in consecutive order or before a certain age. The only caveat to that is your income after you elect to receive your Social Security benefits does not alter your payment amount. So if you continue to work while receiving Social Security, that income amount will never be factored into your payout. If you know you will have a good income year in your 60s and you’re on the fence about receiving your Social Security benefits, it could make sense to defer for a year so that your income for the prior year is counted in your benefit calculation.
Now that we know a few myths that tend to be commonplace within pre-retiree conversations, let’s take a closer look at Social Security claiming strategies and what you should consider before making your irrevocable decision.
Factors When Choosing Your Social Security Claiming Strategy
There are three key factors to consider when analyzing your Social Security benefits options.
- Age. Your age is an important factor because it drives the dollar amount you will receive when you claim your Social Security benefits. If you elect to receive your benefits prior to age 70, you should consider your break-even point. Your financial advisor should be able to run hypothetical models and reports that can give you a succinct breakdown of your potential Social Security benefit amount each year of your life leading up to age 70. After age 70, there is no increased benefit amount. Therefore, there is no reason to wait beyond this point to make your claim.
- Life expectancy. Life expectancy is a driving force behind your Social Security claiming strategy and one of the most individualist aspects of your financial plan. The better understanding you have of your own health, your spouse’s health, and your family health history, the better decision you can make when identifying your Social Security claiming strategy. If you anticipate health problems in the near future, it may make sense to take your Social Security benefits early. On the other hand, if you expect to live out a long and healthy retirement, it probably makes sense to wait longer before you claim. Your insight into your personal health should help guide your Social Security claiming strategy, and you should not hesitate to share this information with your financial advisor. They can help you make the most informed decision possible.
- Need. What is your income need now, and what will your income need be in the future? The answer to this question is an important one when developing a Social Security claiming strategy. That’s not to say that you can’t retire earlier than planned or even later than planned, but in general, you should have an idea of how much income you and your family will need to sustain your retirement lifestyle. Once you have identified this number, an experienced advisor can help you reverse engineer that scenario to understand what assets can be leveraged for income and what assets are better left untouched during retirement.
Unique Social Security Claiming Strategies for Executives
So, now that we know the key factors to think about, what are some strategies for making your Social Security benefits claim? Of course, if you need the income right away, we would advise that you use this asset that you have built up within the Social Security system. However, many of our executive clients don’t have an immediate need for this income. In that case, here are two strategies many people don’t consider when making their Social Security benefits claim:
- Leverage your benefits to buy life insurance. If you have an inclination to leave a legacy for your family and want to limit the amount of taxation on them when you pass away, there is a strategy to consider. You can claim your Social Security benefits and leverage that income to fund a second-to-die life insurance policy on you and your spouse that provide a tax-free payout to your family when you both pass away. In many cases, this amount will be much more than the funds invested into it.
- Split up when you and your spouse claim your benefits. Another Social Security claiming strategy that most people don’t consider is having the lower income-earning spouse claim their benefit early, while allowing the higher income-earning spouse’s benefit to grow until age 70. Many times, spouses believe that they both need to file for Social Security benefits at the same time, which is not the case.
Especially if you are planning to work through your 60s, this strategy can be advantageous for tax purposes. If you both elect Social Security payments, you would be negating much of your benefit amount in taxes alone on your Social Security income. However, if you wait until your income is lessened by your retirement, you should have a lower tax burden. If you have absolutely no need for the Social Security income, you can both defer to age 70, or you can use your spouse’s Social Security benefit to buy life insurance.
At the end of the day, you need to consider your personal financial situation before making any decisions regarding your Social Security claiming strategy. One of the best ways to gain a deeper understanding of your Social Security benefits is by sitting down with a financial advisor who has experience helping top-level executives analyze their options and make their claim. The sooner you can begin to plan for this stage of your life, the better.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for Social Security benefits analysis and retirement planning. For more information on how Wade and the Carpenter Team can advise you on Social Security claiming strategies, reach out today for a complimentary consultation.
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