Social Security is an essential source of retirement income for many Americans, including Certified Public Accountants. This holds especially true when considering the current state of retirement statistics. The combination of inadequate savings rates, prolonged retirements, and extended lifespans can easily throw a wrench even into the soundest retirement plans.
Therefore, deciding when to start taking benefits can significantly impact an individual’s retirement income and overall financial plan. This article stresses the advantages of delaying Social Security benefits until the age of 70 for maximal retirement success.
At the same time, we consider potential scenarios where withdrawing from Social Security earlier may become necessary, though far from ideal.
Social Security Distributions
As a CPA, it’s vital to understand the advantages of waiting for Social Security benefits. Under current laws, individuals can start Social Security benefits early at the age of 62, but the monthly benefit will be 30% less.
The value of Social Security benefits increases the longer an individual waits to claim them, up until 70. Beyond that point, there is no additional benefit to delaying the claim.
- Age 62: 70% benefit
- Age 67: 100% benefit
- Age 70: 124% benefit (132% if FRA was age 66)
As shown in the table above, delaying Social Security benefits can result in a higher monthly benefit amount, leading to a more secure retirement income, particularly in later years when healthcare costs may increase, and savings may be depleted.
Postponing Social Security can be particularly advantageous for those who anticipate a longer lifespan or have limited retirement savings. In such cases, it’s crucial to consider the feasibility of living on reduced savings or continuing to work before making a decision.
Simply looking at 2023 payouts easily proves this point. The maximum payout afforded to a 62-year-old retiree in 2023 will be only $2,572, while a 70-year-old will receive $4,555!
Social Security Planning for Spouses
Regarding Social Security planning for couples, there are several factors to consider, including age differences, health, and retirement goals. The age one begins collecting benefits can significantly impact the overall retirement income for both individuals, and it’s crucial to coordinate the filing decision with your spouse to maximize benefits in a way that works best for you. It is important to note that an individual cannot receive both their own and a spousal Social Security benefit simultaneously. They can choose to receive the higher benefit amount among the two options.
If the higher-earning spouse earns at least twice as much, it may even make sense for the first spouse to begin collecting on the spouse’s earning record when that spouse begins claiming benefits. In some cases, the wait may not be that long if there is a significant age difference between spouses.
One potential strategy involves the lower-earning spouse taking Social Security benefits earlier and allowing the second, higher-earning spouse to wait until FRA or later to claim benefits. This is because the higher earner’s benefit increases will be more significant than the lower earner’s. At the same time, they will receive potentially needed benefits.
For example, if one spouse is 62, and the other is 69, the younger spouse would only have to wait a year to start claiming benefits based on their spouse’s earnings record. Conversely, if the spouses are the same age, they could be in for a long wait.
We go further into Social Security Planning for Spouses in this article
Cost of Living Adjustments (COLA)
We should also point out that, unlike investment accounts, Social Security payouts are adjusted for inflation. Regardless of your benefit percentage, you will receive yearly COLA increases, if applicable. Unfortunately, COLA adjustments don’t always keep pace, especially during high inflation.
Therefore, it is of much greater value to you to at least receive the highest payout possible to help make up for that fact.
Social Security and Taxes
Of particular interest to CPAs is that delaying Social Security benefits can positively impact your overall tax situation. If you have a high income in retirement, taking Social Security benefits early can push you into a higher tax bracket, naturally resulting in a higher tax bill.
Retirees can avoid or minimize the tax impact both OF and ON their Social Security income by waiting to take benefits.
PRO TIP: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, or West Virginia TAX Social Security!
Retirement Planning
Retirement planning can be a complex process, and one aspect to consider is the tax implications of different types of accounts based on their tax status. As a CPA, it’s critical to understand the tax rules of traditional IRAs, Roth IRAs, 401(K) plans, and regular capital-gains taxed accounts in order to develop a tax-efficient strategy. It may make sense to partner with a financial advisor specializing in lowering your lifetime tax obligations rather than just trying to lower your tax bracket each year.
In this regard, a financial advisor can recommend using a combination of capital gains accounts, traditional IRA and 401(K) accounts and Roth accounts to manage the tax implications of retirement income. For example, an individual with a high income in retirement choosing to retire early at age 62, but holding off from taking Social Security, may withdraw money first from a capital gains account.
Once those funds are expired, you may want to pull from a traditional IRA or 401(K) account to take advantage of the lower tax bracket before taking Social Security. Finally, you can withdraw money from a Roth IRA or Roth 401(K) account to minimize (or eliminate) the tax impact on your Social Security benefits.
Taxable Accounts -> Tax-Deferred Accounts -> Tax-Free Accounts
Of course, you may find that withdrawals from a taxable account are not enough to sustain your preferred lifestyle. In such a case, a financial advisor can advise on the most tax-efficient withdrawal method to keep you in a lower tax bracket.
Taking Social Security Benefits Early
While some individuals may choose to wait until their full retirement age or even later, there are scenarios where it may make sense to start taking benefits as soon as possible.
Low Retirement Savings
One scenario where it may make sense to begin taking Social Security benefits early is if an individual has low savings and no other source of retirement income. In such cases, Social Security can cover essential expenses while the individual builds their savings, investments, or a combination thereof.
No Retirement Savings
Finally, if an individual has no other source of retirement income, such as a pension or rental income, starting to take Social Security benefits as soon as possible can provide a source of income to cover basic expenses. At the same time, they can still work and save, if at all possible.
Negative Sequence of Returns
Heading into retirement during a bear market or recession can have dire consequences for a retirement portfolio. After taking a market beating, a retirement account may never recover, especially if the retiree is withdrawing from it regularly. In such a case, it may make sense to start taking social security and giving the markets (and the investment portfolio) time to recover.
|
Year
|
Balance
|
Historical Return
|
Annual Withdrawal
|
|---|---|---|---|
|
2008
|
$1,000,000
|
-38.5%
|
$60,000
|
|
2002
|
$555,142
|
-23.4%
|
$60,000
|
|
2014
|
$365,428
|
11.4%
|
$60,000
|
|
2018
|
$347,052
|
-6.2%
|
$60,000
|
|
2017
|
$265,431
|
19.4%
|
$60,000
|
|
2011
|
$256,925
|
0.0%
|
$60,000
|
|
2003
|
$196,916
|
26.4%
|
$60,000
|
|
2010
|
$188,864
|
12.8%
|
$60,000
|
|
2007
|
$153,006
|
3.5%
|
$60,000
|
|
2021
|
$98,406
|
26.9%
|
$60,000
|
|
2012
|
$64,867
|
13.4%
|
$60,000
|
|
2001
|
$13,563
|
-13.0%
|
$11,794
|
|
2009
|
$0
|
23.5%
|
$0
|
|
2005
|
$0
|
3.0%
|
$0
|
|
2020
|
$0
|
16.1%
|
$0
|
|
2000
|
$0
|
-10.1%
|
$0
|
|
2019
|
$0
|
30.4%
|
$0
|
|
2004
|
$0
|
9.0%
|
$0
|
|
2013
|
$0
|
29.6%
|
$0
|
|
2006
|
$0
|
13.6%
|
$0
|
|
2015
|
$0
|
-0.7%
|
$0
|
|
2016
|
$0
|
9.5%
|
$0
|
|
|
End of Period Balance
|
Average Return
|
Total Withdrawals
|
|
|
$0
|
-6.0%
|
$671,794
|
As we can see in the chart above, heading into retirement during a turbulent market can have a disastrous effect on a portfolio.
|
Year
|
Balance
|
Historical Return
|
Annual Withdrawal
|
|---|---|---|---|
|
2006
|
$1,000,000
|
13.6%
|
$60,000
|
|
2010
|
$1,076,194
|
12.8%
|
$60,000
|
|
2017
|
$1,153,761
|
19.4%
|
$60,000
|
|
2003
|
$1,317,591
|
26.4%
|
$60,000
|
|
2013
|
$1,605,176
|
29.6%
|
$60,000
|
|
2007
|
$2,020,329
|
3.5%
|
$60,000
|
|
2000
|
$2,031,638
|
-10.1%
|
$60,000
|
|
2015
|
$1,765,646
|
-0.7%
|
$60,000
|
|
2018
|
$1,692,817
|
-6.2%
|
$60,000
|
|
2005
|
$1,527,354
|
3.0%
|
$60,000
|
|
2009
|
$1,513,191
|
23.5%
|
$60,000
|
|
2019
|
$1,808,097
|
30.4%
|
$60,000
|
|
2020
|
$2,298,301
|
16.1%
|
$60,000
|
|
2021
|
$2,608,328
|
26.9%
|
$60,000
|
|
2001
|
$3,249,707
|
-13.0%
|
$60,000
|
|
2011
|
$2,765,858
|
0.0%
|
$60,000
|
|
2014
|
$2,705,770
|
11.4%
|
$60,000
|
|
2002
|
$2,953,975
|
-23.4%
|
$60,000
|
|
2004
|
$2,203,750
|
9.0%
|
$60,000
|
|
2012
|
$2,341,943
|
13.4%
|
$60,000
|
|
2016
|
$2,595,897
|
9.5%
|
$60,000
|
|
2008
|
$2,783,416
|
-38.5%
|
$60,000
|
|
|
End of Period Balance
|
Average Return
|
Total Withdrawals
|
|
|
$1,652,196
|
7.3%
|
$1,320,000
|
In this scenario, a positive sequence of returns led to a healthy portfolio throughout retirement.
In Conclusion
In conclusion, as a CPA, it’s crucial to be aware of the benefits of delaying Social Security benefits and their impact on your retirement income and overall financial plans. By understanding the advantages of waiting to claim Social Security benefits, the effect of COLA, and the tax implications of different types of accounts, CPAs can make informed decisions about when to start taking Social Security benefits.
Financial advisors can play a vital role in providing the tools and resources needed to navigate the complexities of the Social Security system and develop a comprehensive retirement strategy.
