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How To Optimize Your Social Security If You Have More Than $250,000
If you are nearing retirement age, you might be wondering when to start drawing Social Security benefits.
Social Security: Whether You’re 62, 65, 67 or 70, Here’s Why Your Age Matters
See: 3 Ways To Recession-Proof Your Retirement
If you don’t have much saved for retirement, you may be counting on Social Security to cover a big chunk of your expenses. In general, working longer gets you the biggest benefit, and claiming at age 70 will help you maximize your income.
But if you have been diligent with investing for retirement and have over $250,000 saved in retirement accounts, Social Security withdrawal strategies get a bit more complicated and nuanced.
Here are a few things to consider when debating when to tap your Social Security benefits.
How Much, Exactly, Do You Have Saved?
Before applying for Social Security benefits or choosing when to begin accessing your benefits, take inventory of all your retirement savings accounts. Add up how much you have saved in workplace accounts, IRA accounts and even HSA accounts.
“Allowing your Social Security to grow from 62 to full retirement age and NOT take the 25% benefit reduction…is an important factor,” said Jeffrey J. Smith, CFP® and managing partner at Owl Private Wealth Advisors.
If you have over $250,000 saved, you might be able to use some of that savings to bridge the gap between when you choose to retire and getting the max Social Security benefit at age 70.
Find Out More: Experts Propose Tax Cap as Social Security Solution — Which Americans Would Be Most Affected?
Do You Have Other Income Sources?
Claiming Social Security is a great way to cover your retirement expenses, but if you have other income coming in, you might be able to delay claiming your Social Security even further. Income from pensions, real estate, investments or other passive income can allow you to avoid taking Social Security too early.
“Why not allow your government-guaranteed, inflation-adjusted income stream to grow and utilize tax-deferred savings to help pay the bills and possibly have the income you need, while allowing Social Security to grow AND help offset the inevitable Required Minimum Distributions tax bill that you will face in your 70s,” Smith said.
These other income sources give you more control over your Social Security strategy, and can also help you save on taxes if you manage it correctly.
How Long Are You Planning To Work?
If you’re looking to tap your Social Security benefits soon but are still working, you may want to reconsider. Not only is there an income limit for claiming Social Security benefits, but you might end up paying more in taxes as well.
For example, if you’re under “full retirement age” then starting your Social Security benefits requires you to cap your income at $21,240 per year. For every $2 you earn over that income, you lose $1 in Social Security income. In the year you reach full retirement age, you can earn up to $56,520 without penalty, but are deducted $1 for every $3 you earn over the limit. Once you’re at full retirement age, there is no limit.
For planning purposes, even if you’re just working part time, if you can cover the rest of your expenses with your investments instead of Social Security, you might still come out ahead by delaying your Social Security until age 70. With an 8% increase annually from age 67 to age 70, it’s one of the better (guaranteed) returns on your money available.
Can Your Spouse Claim Social Security Too?
If your spouse is also close to retirement age and can claim Social Security, you still might benefit from waiting. And if your spouse’s Social Security benefit is less than half of yours, they might be able to get more by a spousal benefit instead.
If you’re the higher-income earner, your spouse can claim half of your full retirement age benefit. This can go a long way to increasing your lifetime Social Security benefits as a married couple.
But while it may be better for you to wait until age 70 to claim the highest benefit, if your spouse is claiming the spousal benefit, they should claim it at full retirement age. There is no additional bonus for waiting beyond full retirement age, as the spousal benefit is capped.
Claiming Too Early Might Cost You (a Lot)
If you claim Social Security benefits too early, you will collect up to 30% than waiting until full retirement age depending on when you start collecting. And while you may think claiming sooner gives you more (because you get more years of benefits), it actually might cost you a lot.
Finding the sweet spot is a complicated task, and one better suited for a licensed financial advisor. They can run scenarios through retirement planning software and tools that help you see the potential outcomes of several different scenarios.
You can also take a look at this Social Security calculator that shows how much you get per month (estimated) based on your average lifetime earnings per year, and the age you choose to claim. It will also show your lifetime benefit estimate, so you can see when to claim for the most lifetime value.
For example, if you average $65,000 per year and claim at age 62, your estimated benefit is $1,396 per month with a lifetime benefit of $393,900. But if you delay until age 70, your estimated benefit is $2,459 per month with a lifetime benefit of $442,620. Input your own numbers to see how the benefit can change over time.
And Smith said, “once you are 70 there is NO reason to NOT file and collect your benefit as the benefit is maxed out at age 70, but the decision to claim between 62 and 70 is one you may want to chat with a financial advisor about.”
Bottom Line
Claiming your Social Security benefits at the right time is important, as it can have a big impact on your retirement and total lifetime income. But it’s not a black-and-white choice, as there are many factors that can affect your retirement income and taxes. Consulting with an investment and tax professional can help you choose the best path forward, and maximize your Social Security earnings for the rest of your life.
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This article originally appeared on GOBankingRates.com: How To Optimize Your Social Security If You Have More Than $250,000