Part 2: Should You Take Social Security Early, at Full Retirement Age or Delay?
See below how one good, intended decision almost lost my client over $1,000,000 dollars in social security benefits.
Why Planning for Social Security is Important
The majority of retired workers claim social security before their full retirement age without having worked with an advisor or having completed proper financial planning. In many cases the best strategy is to delay social security until full retirement age or until age 70 while earning additional delayed credits.
Key Factors in Deciding to Delay or Take Social Security Early?
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The break-even age for claiming Social Security at 62 compared to 67 is about 79, and at 62 versus 70, it's around 80. If your family members have lived past 80 and you are healthy, it might be wise to wait until your full retirement age or later to take Social Security.
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If you retired early, had to retire suddenly, need cash, have few other savings, or are not in good health, it might make sense to start taking Social Security early, even with a 30% cut.
If you start Social Security before turning 65, you'll be enrolled in Medicare Part A and B at 65 and won't be able to contribute to an HSA anymore.
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Full time: If significantly above the earnings limit consider delaying. (Refer to table from last week’s blog.)
https://www.villewealth.com/blog/5-questions-about-applying-for-social-security-answered
Part time: If under the limit or not significantly above the limit and you need the income consider taking early.
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Delaying Social Security benefits while managing your cash flow needs utilizing existing assets can be the most effective strategy, particularly when you focus on withdrawing from lower-earning investment accounts or cash accounts.
The advantages of receiving Social Security benefits earlier become more pronounced if, for instance, your investment account has recently experienced a significant downturn in value or if you anticipate a consistent expected rate of return of at least 6%. This approach allows for greater flexibility and can help optimize your financial outcomes during retirement.
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Large retirement accounts typically mean that you will face larger required minimum distributions (RMDs) as you reach age 73, which inevitably leads to higher taxes overall. This situation can cause increased taxes on your Social Security benefits and result in significantly higher premiums for Medicare Part B and D due to the Income Related Monthly Adjustment Amount (IRMAA). To mitigate these financial implications, considering the option of delaying your Social Security benefits and reducing your overall retirement account balances through strategic withdrawals or Roth conversions may help lower your lifetime taxes and RMDs effectively.
2023 RMD age increased to 73; in 2033 it will increase to 75
2024 no RMDs on Roth 401ks going forward
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High-net-worth and high-income individuals may find themselves in a position where it is not possible to completely avoid paying taxes on their Social Security benefits. This situation can become particularly relevant for those who are nearing the thresholds that determine the taxation of benefits, as well as individuals who are actively looking for ways to minimize their overall tax burden during retirement. It may be prudent to consider strategies such as building tax-free assets and reducing reliance on tax-deferred accounts.
Some specific approaches to consider include potentially delaying the initiation of Social Security benefits and strategically increasing withdrawals from retirement accounts.
Additionally, options like Roth IRA and Spousal Roth IRAs should be evaluated, and if eligibility is an issue, exploring strategies such as Back Door Roth IRAs or Spousal Back Door Roth IRAs could be beneficial. Other alternatives include contributing to a Roth 401(k), utilizing Health Savings Accounts, or considering Cash Value Life Insurance as viable solutions. If your 401(k) plan allows for after-tax contributions, the Mega Back Door Roth may also present an advantageous option worth exploring.
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Colorado - 4.4%
Starting January 1, 2022, taxpayers aged 65+ can deduct all Social Security benefits from taxable income. From January 1, 2025, taxpayers aged 55-64 can also deduct all benefits if their adjusted gross income is below $75,000 (single) or $95,000 (joint). Those above these limits can deduct only up to $20,000.
Connecticut - 2% to 6.99%
In Connecticut, Social Security benefits aren't taxed if AGI is under $75,000 for single or married filing separately filers. For married filing jointly or head of household filers, the threshold is $100,000. If AGI exceeds these limits, up to 25% of benefits may be taxed.
Minnesota - 5.35% to 9.85%
Taxpayers can subtract a portion of social security benefits from Minnesota taxable income. This subtraction equals 100% of taxable social security income, reduced by 10% for each $4,000 ($2,000 for married separate filers) above a phase-out threshold. In 2025, thresholds are $108,320 for married joint filers, $54,160 for married separate filers, and $84,490 for single and head of household filers. An alternative subtraction may apply in certain cases.
Montana - 5.9%
Incomes over $32,000 for married couples or over $25,000 for individuals are subject to state taxes on Social Security benefits. For taxpayers above those limits, but below $34,000 for single filers or $44,000 for joint filers, 50% of Social Security retirement income is deductible. For filers with an AGI above these secondary limits, only 15% is deductible.
Beginning in 2026 the exemption base amounts will increase to $40,000 for single filers and $65,000 for joint filers.
New Mexico - 1.7% to 5.9%
New Mexico taxpayers can avoid state taxes on Social Security thanks to 2022 legislation. Single residents earning under $100,000 and married couples under $150,000 can fully deduct Social Security from taxable income. Those with higher incomes face a tax of 1.7% to 5.9% on Social Security benefits.
Rhode Island - 3.75% to 5.99%
In Rhode Island, residents avoid Social Security taxes if they are at full retirement age and earn below $104,200 for single filers and $130,250 for joint filers. Others pay income taxes on benefits, ranging from 3.75% to 5.99%.
Utah - 4.55%
Utah taxes Social Security benefits, but retirees may qualify for a Social Security benefits credit using the state's worksheet. There’s also a $450 retirement tax credit, which can't be claimed with the Social Security credit. The flat tax rate on taxable income is 4.55%.
Vermont - Up to 8.75%
Vermont taxpayers pay no taxes if they earn less than $50,000 as single filers or $65,000 as joint filers.
West Virginia - 2.2% to 4.82%
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Having other assets or income to draw from can allow you to delay Social Security and benefit from the delayed retirement credits.
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If married, it's important to look at the timing of Social Security for you and your spouse as well as whether to take your own retirement benefits vs spousal benefits.
Spousal Benefits: must be at least 62 (or caring for worker’s minor or disabled children), been married for at least one year, and the primary worker must have already filed for their benefits.
If non‐working spouse is younger than primary worker, consider having the primary worker delay until FRA or age 70. This will allow the younger non‐working spouse to increase their 50% spousal benefit to a higher 100% survivor benefit if the primary worker passes first.
If the primary earner has health issues, consider taking Social Security spousal benefit early as you will convert to the higher survivor benefit at their passing.
If dually entitled (qualify for own benefit as well as spousal): you will always receive the higher benefit amount between the two unless your spouse has not filed yet, making the spousal benefit not yet eligible.
If you and your spouse are of similar age and your spouse will be taking spousal benefits from your record, only delay until age 70 if you are still working. This is because spousal benefits are not permitted until the primary earner files; in addition, the spousal benefits are not increased from FRA to age 70.
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If divorced, you can collect spousal benefits on your ex‐spouse if: You were married at least 10 years.
You’re not remarried unless you were remarried after age 60.
You’re at least age 62 (or caring for worker’s minor or disabled children).
You have been divorced at least two years or you’ve reached FRA, or your ex‐spouse has already filed for benefits.
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Benefit Requirements:
Was married at least nine months
Unmarried or not remarried until after age 60
As early as age 50 if disabled
Widows can claim survivor benefits as early as age 60 (28.5% reduction of deceased spouse’s FRA amount). Survivor benefits, unlike spousal benefits, are not impacted by the date you file for SS benefits on your own record.
Widow Limit: If the deceased spouse claimed their retirement benefit before their full retirement age (FRA), the maximum survivor benefit is limited to the greater of what the deceased was receiving at death or 82.5% of the deceased’s FRA benefit. If the widow claims the survivor benefit before their FRA it will be reduced.
Potential Strategy: Consider taking the survivor benefit (widow benefit) at age 60 and delay your own retirement benefit until age 70. At age 70, switch from your survivor benefit to your own benefit, if higher. Widows are the only exception to this strategy. Lastly, widows are subject to the earnings test until FRA.
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Based on previous changes to Social Security, those already taking Social Security or those within a few years of taking Social Security have historically not been impacted. Unless you are currently younger than age 55, taking Social Security early at age 62 to ensure your benefits are not impacted is probably not a valid reason by itself, unless it is truly keeping you up at night.
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If more than one item above applies to you and your family, the best way to determine when to take Social Security is to have your advisor help you build your own financial plan as well as run tax projections to determine the impact taxes may have on your Social Security or Medicare premiums. Contact Ville Wealth Management to get started.
How one good intended decision almost lost my client over $1,000,000 dollars in social security benefits.
A few years ago, one of my clients was looking forward to getting married after having been widowed a few years back. His fiancée, who also had experienced the loss of her spouse, was in a similar situation; both of them had originally been married to higher-earning individuals.
At the time of their engagement, my client and his fiancée were both 58 years old, which was about to add a significant layer of complexity to their financial planning process. Both individuals were expecting to begin collecting social security widow benefits at the age of 60, based on the earnings of their prior spouses. As I meticulously built their comprehensive financial plan, I soon realized that if they chose to get married before reaching that crucial age of 60, they would unfortunately forfeit the valuable opportunity to receive social security benefits from their previous spouses due to a lesser-known social security rule that they were not initially aware of. (See the “Widowed” key factor above for more information about the rule.)
The difference in benefits between what they would receive on their personal records compared to the benefits on their deceased spouses’ records amounted to well over $1,000,000. Although this realization took my clients by surprise, they ultimately decided to postpone their wedding until they reached the age requirement. This real-life example underscores the critical importance of planning for social security in advance and highlights the numerous advantages that thoughtful financial planning can provide.
Ville Wealth Management is a Registered Investment Adviser in the state of Ohio. Advisory services are only offered to clients or prospective clients where Ville Wealth Management and its representatives are properly registered or exempt from registration. “Likes” should not be considered a positive reflection of the investment advisory services offered by Ville Wealth Management. Brian Jaros is an investment adviser representative of Ville Wealth Management. The firm is a registered investment adviser and only conducts business in jurisdictions where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. The information presented on this post is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Comments should not be construed as an offer to buy or sell, or a solicitation of an offer to buy or sell the investments mentioned. A professional adviser should be consulted before implementing any of the strategies discussed. Investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio. All investment strategies can result in profit or loss.
