Valuing Social Security for Wealthy Individuals

Valuing Social Security for Wealthy Individuals

Sep 15, 2017

It’s expected that in 2017 more than 62 million Americans will receive roughly $955 billion in Social Security benefits.[i] The vast majority of these individuals need this income in order to afford retirement.

In this post, we’re seeking to help individual investors who don’t need Social Security income. Specifically, we want you to better understand how to value Social Security within your overall financial plan.

Medium to High-Net-Worth Individuals

You’ve been contributing to Social Security for many years, and even though you may not need the added income, it’s your right to collect it. Therefore, we’d like to outline some concepts for you to consider when contemplating the overall value and benefits of Social Security and how they factor into your life.

Even though you don’t need the money, there are some legitimate reasons to collect your Social Security benefits early, just as there are key reasons to hold off collecting until you’re age 70. Furthermore, some creative strategies for this excess income could make a tremendous positive impact on another life.

Here are 4 Concepts to Consider:

#1 – Supplement Income During Retirement

“When working with many of our clients, we tend to view Social Security as supplemental income to be used during retirement years,” said Kevin Woods, CFP® and Director of Financial Planning at Gratus Capital. “Even though you may not need Social Security given your sizable retirement savings, it’s important to value the benefits derived from Social Security income.”

For example, Social Security can be used to supplement health care and Medicare costs, provide investment income, pay for unexpected lifestyle needs, and to help with future expenses overall. “Social Security adds value to almost any financial plan, and it’s important to identify how this income will be allocated during your retirement years,” said Woods.

#2 – Redistribute Social Security Income

Let’s say you’ve grown your financial assets to the point that you have no real need to spend your Social Security income, yet you’re still receiving $2,000 a month in benefits. There are many beneficial ways to redistribute this income while helping others and enriching lives at the same time, according to Woods.

He cites the following examples:

  • Grandchild’s college education
  • Adult child’s first home or business
  • Alma mater
  • Irrevocable trust for special needs dependent
  • Loved one’s long-term care
  • Humanitarian and other Charitable Giving Efforts
  • Travel expenses for outreach volunteers

#3 – Reasons to Collect Social Security Early

“While your robust investment portfolio will likely cover your retirement expenses, there are generally three reasons to consider taking Social Security early,” said Woods.

These Include:

  1. Health
  2. Change in investment income
  3. Higher expenses early in retirement

However, there may also be a fourth reason to consider collecting Social Security early.

In a recent Kiplinger article[ii], Financial Advisor and CERTIFIED FINANCIAL PLANNER™ Professional Scott Hanson discusses the concept of “means testing” and suggests that high-income retirees may ultimately receive reduced Social Security benefits.  He writes, “One thing we know is that Social Security, in its current form, cannot continue forever. There simply aren’t going to be enough workers to pay for the benefits of all the projected retirees. Payroll taxes will either have to increase, or benefits will have to be reduced…or a combination of both.”

Hanson reminds us that for roughly its first 45 years, Social Security income was tax-free. However, as the years passed, laws were passed and wealthier individuals’ benefits were taxed.  The tax situation has also been compounded, given federal income tax increases.

Along the same lines, many of Woods’ clients believe that the Social Security system won’t sustain itself and, therefore, choose to collect their benefits as early as possible. Woods agrees that decreasing Social Security benefits for wealthier individuals is a valid concern and that collecting benefits early is a reasonable response relative to your individual goals.

For more information regarding Social Security means testing, read the AARP Public Policy Institute’s Reforming Social Security[iii] special report.

#4 – Reasons to Delay Taking Social Security

According to AARP[iv], the longer you wait to start collecting your Social Security benefits, the higher the amount you’ll receive.  The popular social welfare organization cites the following examples:

If you postpone collecting Social Security until your full retirement age of 66*, your benefit will be 25 percent higher than if you started as early as possible.  However, if you delay collecting beyond your full retirement age, then your benefit will go up eight percent a year until age 70, essentially equating to a 32 percent bonus.

In general, Woods recommends delaying your Social Security benefits until you reach age 70. A key reason is due to a frequent income earning disparity among couples, whereby one spouse has earned significantly more income over the years as compared to the other spouse.  By waiting, you’ll likely leave your surviving spouse in a stronger financial position.

For example, one spouse may be eligible to receive $2,500 per month in Social Security benefits at age 70, while the other spouse may only receive $1,500 per month.  If the greater-earning spouse passes away, the surviving spouse would receive the greater of the two Social Security benefits payouts, i.e., $2,500 rather than $1,500 a month.

Special attention should be given to the status of your health and that of your spouse when determining the best time to start collecting your Social Security benefits, said Woods.

*Your full retirement year is based on the year you were born.  To determine your full retirement year, consult Social Security’s Retirement Planner: Benefits by year of birth[v].

In Closing

Gratus Capital’s financial planning approach addresses complex wealth management issues faced by our clients.  And while many of our clients do not rely on their Social Security benefits to experience a financially fulfilling retirement, we believe that the value of this income should be included within every financial plan.  If you have questions regarding your Social Security benefits or any other financial, estate or trust planning concerns, please do not hesitate to contact us[vi].

Helpful Resources

Obtaining Your Social Security Online Statement[vii]

Social Security Estimator[viii]

Authored By:

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal, or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business.