A counterintuitive Social Security strategy can fund an early retirement

Astute financial producers recognize that some of the most successful planning strategies are those customized to meet the individual client’s needs, and, in some cases, this means defying conventional wisdom and focusing on the numbers at hand. Effective Social Security planning is no different. While it may seem obvious to some advisors that clients should be counseled to delay collecting Social Security in order to maximize benefit levels, in reality this may not be the most effective strategy for many clients. By going against the grain and claiming benefits early, this counterintuitive Social Security strategy can actually help clients make the most of their traditional retirement savings accounts.

Conventional wisdom

Most advisors are aware that a client’s Social Security benefit level will increase by about 8% for each year the client delays retirement beyond full retirement age and that claiming benefits early will actually lead to a reduction in benefits. Unfortunately, these statistics often lead advisors to provide the relatively standard guidance that, as long as the client is in good health, claiming Social Security benefits should be delayed for as long as possible.

By delaying benefits, the client will ensure the highest possible Social Security benefit for life, but for many clients, this may actually lead to an early depletion of traditional retirement savings accounts.

An integrated approach

Clients who wish to delay retirement until age 70 may be best served by adhering to the traditional approach in delaying Social Security for as long as possible. For those clients who wish to retire early, however, claiming benefits early may actually enable them to make better use of their hard-earned retirement dollars by using Social Security to fund the bulk of their living expenses while retirement funds continue to grow on a tax-preferred basis.

The strategy is magnified for couples aiming to retire relatively early. Recent studies show that if the lower earning spouse claims benefits at the earliest possible age—currently sixty-two—the couple can save upwards of $400,000 in retirement account withdrawals (depending, of course, on their earnings records and ages). The lower earning spouse may be locked into the lowest Social Security benefit level, but the higher earning spouse can then file for spousal benefits at age sixty-six and wait to collect his or her own maximum benefit at age seventy.

While the lower earning spouse will not be able to claim his or her maximum benefit, by combining the low benefit available at age sixty-two with spousal benefits, the couple may be able to retire early—with minimal increases to withdrawals from a 401(k) or IRA that would otherwise be necessary to fund living expenses. Eventually, this strategy will increase the long-term value of the client’s tax-preferred retirement accounts because a larger amount will be left to grow within the account.

Individual taxpayers may similarly find the file and suspend strategy useful, as it can function as a sort of insurance policy. Claiming Social Security before age 70 and then suspending those benefits so that the maximum benefit level is obtainable allows your client to claim retroactive benefits from the original filing date, should circumstances change so that he requires additional income. If the client simply waited until reaching age 70 to file, only up to six months’ worth of retroactive benefits could be available.

Conclusion

Like any other planning strategy, each client’s individual circumstances will dictate how to make the most of Social Security entitlement. For many clients, however, claiming benefits at seventy may not be the most financially beneficial decision, especially if retiring early and deferring retirement account withdrawals are a priority.

See also:

About the Author
William H. Byrnes

William H. Byrnes

William Byrnes is the leader of Summit Business Media's Financial Advisory Publications, having been appointed July 1, 2010. He has been an author and editor of ten books and treatises and seventeen chapters for Lexis-Nexis, Wolters Kluwer, Thomson-Reuters, Oxford University Press, Edward Elgar, and Wilmington, as well as numerous commissioned, peer-reviewed, and law review articles. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, which subsequently amalgamated into PricewaterhouseCoopers, practicing in Africa, Europe, Asia, and the Caribbean.

He has been commissioned and consulted by a number of governments on their tax and fiscal policy from policy formation to regime impact. He has served as an operational board member for companies in several industries including fashion, durable medical equipment, office furniture, and technology. Since 1994, he has been a professional trainer for professional association conferences, government workshops, and financial service institutions in-house meetings.

Before Associate Dean Byrnes joined the administration of Thomas Jefferson School of Law, he was a tenured law faculty member at St. Thomas School of Law. He serves on the Academic Committee of the American Academy of Financial Management. He created the first online graduate program offered to wealth managers and life insurance producers without any legal background—see http://llmprogram.tjsl.edu (Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law).

Email: wbyrnes@nationalunderwriteradvancedmarkets.com

About the Author
Robert Bloink

Robert Bloink

Robert Bloink worked to put in force in excess of $2B of death benefit for the insurance industry’s producers in the past five years. His insurance practice incorporates sophisticated wealth transfer techniques, as well as counseling institutions in the context of their insurance portfolios and other mortality based exposures. Robert Bloink is a professor of tax for the Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law.

Previously, Robert Bloink served as Senior Attorney in the IRS Office of Chief Counsel, Large and Mid-Sized Business Division, where he litigated many cases in the U.S. Tax Court, served as Liaison Counsel for the Offshore Compliance Technical Assistance Program, coordinated examination programs audit teams on the development of issues for large corporate taxpayers, and taught continuing education seminars to Senior Revenue Agents involved in Large Case Exams. In his governmental capacity, Mr. Bloink became recognized as an expert in the taxation of financial structured products and was responsible for the IRS’ first FSA addressing variable forward contracts. Mr. Bloink’s core competencies led to his involvement in prosecuting some of the biggest corporate tax shelters in the history or our country. He can be reached at rbloink@nationalunderwriteradvancedmarkets.com

Originally published on ThinkAdvisor. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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