Maximizing Wealth: When to Delay Claiming Social Security
Wealth is a subjective concept, much like happiness. However, individuals with at least $5 million in assets tend to share some financial traits, such as focusing on optimizing their financial life, having larger non-retirement accounts, and dealing with significant taxes. For wealthy individuals, delaying Social Security claiming may be beneficial for several reasons.
Firstly, if someone does not have an immediate need for the money due to significant non-retirement assets, delaying Social Security can result in higher monthly payments as they increase by 8% per year. This guaranteed increase can be hard to match through other investments.
Additionally, delaying Social Security can help individuals take advantage of the ‘tax valley’ that occurs in retirement, where their effective tax rate may decrease. By delaying Social Security until age 70, individuals can keep their tax rates low and potentially engage in tax planning strategies such as Roth conversions and capital gains recognition at lower rates.
Legacy planning is another reason why wealthy individuals may choose to delay Social Security. With the Roth IRA becoming a tax-efficient way to leave a legacy post the SECURE Act of 2020, delaying Social Security can allow individuals to convert traditional retirement accounts into Roth accounts while in a lower tax bracket. This can help in passing on tax-free assets to their heirs.
In the past, financial advisors used various software and spreadsheets to come up with Social Security claiming strategies for clients. However, modern planning software can consider goals, taxes, and other factors to provide an optimal claiming strategy. It is essential for wealthy individuals to consider these factors when deciding whether to delay Social Security claiming.
Ultimately, while wealth is subjective, delaying Social Security claiming for wealthy individuals can result in higher monthly payments, tax advantages, and better legacy planning opportunities. By considering these factors, individuals with significant assets can make informed decisions about when to claim their Social Security benefits.