For most Americans, Social Security represents the largest source of income in retirement and only a measly 4% of all Social Security recipients maximize Social Security benefits. This means that 96% of people are donating their hard-earned money to Uncle Sam for free! As usual, the government wins and you lose.
Luckily for you, things don’t have to be that way!
Social Security is a massive part of overall financial planning. Oftentimes, the claiming strategy you use to claim benefits can make or break your plan and whether or not you can live the retirement of your dreams.
How much SS you receive depends on a few factors.
- Your earnings over your lifetime – as a part of the calculation, your 35 highest paid years of employment are considered in the formula. Generally, your income is higher towards the end of your career than the beginning so delaying retirement may be a good idea.
- The age you begin taking benefits – this is where an advisor comes in handy! Even though SS becomes available to you at age 62, there are major benefits to delaying them. Every year you don’t file, your benefits increase 8% per year until age 70.
- If you’re eligible to receive spousal benefits in lieu of your own – Generally, couples often decide on when to file for benefits independently. But when considered in concert with each other, lifetime benefits can increase significantly. If there is a large income or age disparity between spouses, it may make sense for one spouse to claim benefits earlier.
One aspect you may also not be aware of is you know that SS statement you get every year in the mail? The statement has a number on the top right corner on what your benefits will be once you reach Full Retirement Age (FRA). A lot of people ignore the second half of that sentence and assume that’s what they’ll be getting no matter what. This cannot be further from reality. For most people, FRA is around age 67. So, keep that in mind next time you have that urge to claim benefits earlier than your FRA.
Social Security and tax planning go hand in hand. One planning technique we use with our clients is executing strategic Roth conversions to lower taxes you pay over your lifetime by converting traditional IRA money into Roth IRA. You may be asking yourself, “what does this have to do with Social Security?”
Let’s say you retire and think you can wait before claiming benefits because you have built up a solid retirement nest egg and can draw from that for a few years. If that’s the case, we can implement Roth conversions now given we can keep your income low so that less of the conversion is taxed. This way, you get that extra 8% per year from SS and you convert some of your pre-tax assets to after tax.
At Redrock Wealth Management, we have access to the world’s most powerful Social Security maximization calculators at our fingertips and we use them every day to ensure that our clients are maximizing their Social Security benefits!
Uncle Sam owes you…how much you make him pay is up to you!