Current retirees will collectively miss out on $2.1 trillion in additional wealth because they did not claim Social Security benefits at their optimal age, according to the study “The Retirement Solution Hiding in Plain Sight: How Much Retirees Would Gain by Improving Social Security Decisions.”
When it comes to retirement planning, Social Security is often misunderstood, even among high earners who may view it as a minor part of their financial puzzle. The reality is that the timing of your Social Security claim determines the size of your monthly payment for the rest of your life. It is a decision that could cost high-earning professionals as much as $24,000 a year in retirement, as cited on my company’s Social Security checklist.
My colleague Zack Marcotte, our director of Financial Planning at Berkshire Money Management, recently penned the article “Social Security Mistakes High Earners Often Make (and How to Avoid Them).” It is worth highlighting a few of his tips here.
Mistake #1: Anchoring Social Security to your retirement date
A common misconception among high-income retirees is that their Social Security claim should align precisely with their retirement date. Consider Casey and Sam, aged 64 and 66, respectively, who have decided to retire. They have accumulated $3.5 million of retirement savings and recently received an additional $600,000 from the sale of family property. Casey and Sam considered claiming Social Security immediately upon entering retirement. But that is not necessarily their optimal move.
If Casey and Sam claim Social Security right away, their monthly benefits are significantly reduced for the rest of their lives. By delaying benefits until 70, their payments could increase by nearly 27 percent, but there are other helpful strategies to consider when balancing the need for income and portfolio growth. For Sam, the higher earner, this could mean waiting to claim their benefit to maximize monthly income, while Casey could strategically claim earlier. Meanwhile, their substantial savings can comfortably bridge the income gap, allowing them to maintain their lifestyle without sacrificing future benefits.
Mistake #2: Delaying Social Security without considering longevity
While waiting until 70 generally maximizes monthly Social Security checks, it is crucial to balance this strategy against personal longevity and health factors. If you anticipate significant health challenges or have a family history that suggests a shorter lifespan, claiming earlier may be a wise decision.
A straightforward way to make this decision is by calculating your breakeven point, when the cumulative benefits from waiting exceed those from claiming early. For some, taking the reduced monthly payments at age 62 could make more sense if longevity is not on your side.
Mistake #3: Overlooking the impact of taxes
High earners often underestimate the tax implications tied to their Social Security benefits. Up to 85 percent of your Social Security benefits could be taxable at ordinary income rates. Wealthier retirees who do not plan accordingly may unintentionally push themselves into higher tax brackets, leading to an unpleasant surprise come tax season.
A proactive approach involves managing your taxable income through strategic withdrawals to minimize tax liability. For example, during low-income years, consider withdrawing funds from tax-deferred retirement accounts or converting them to a Roth IRA. These strategies can lower your required minimum distributions (RMDs) later and significantly reduce your lifetime future tax burden.
Mistake #4: Overestimating Social Security’s role in your paycheck-replacement plan
Social Security was never intended to entirely replace your pre-retirement paycheck, especially if your career involved high earnings. For instance, the maximum Social Security benefit at age 70 in 2025 is expected to be around $5,108 per month. While that might sound substantial, it only replaces about 30 percent of a $200,000 annual income.
To ensure financial freedom throughout retirement, integrate Social Security into a comprehensive income strategy that combines pensions, retirement account withdrawals, and tax-efficient distributions from your trust accounts.
Mistake #5: Ignoring spousal and survivor benefits
If you are married, the timing of your Social Security claim affects not only you but also your spouse’s future financial stability. When the first spouse passes away, the surviving partner can claim the higher of the two Social Security benefits. Delaying the higher earner’s claim until 70 can significantly enhance survivor benefits, ensuring your spouse maintains a robust income in your absence.
Social Security, when optimized, can provide significant lifetime benefits and enhance the stability of your retirement strategy. In 2023, roughly 63 percent of retirees collecting Social Security retirement benefits received reduced benefits. There is value to planning your Social Security filing, and it is not a plan to simply default to delaying as long as possible.
Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $1 billion of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representation that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
