“ For wealthy clients , Social Security benefits usually account for a smaller proportion of their overall retirement income , making it easier for them to replace this income temporarily with other savings ,” says Rohan Sharma , a vice president of retirement income solutions at Ameriprise in Seattle . Rich clients can also afford to wait for the maximum benefit , advisors note . “ Most wealthy clients want the largest benefit , so many of them believe the best strategy is to wait until 70 ,” says Thomas Pontius , senior financial planner at Kayne Anderson Rudnick in Los Angeles . “ Many may also still be working or have passive income .”

But the choice isn ’ t always clear . Clients should also consider the impact on survivor benefits , how long they expect to live , their expected investment returns and their cash-flow needs , says Richard Pianoforte , managing director at Fiduciary Trust Company International . For instance , if clients have health issues and likely won ’ t live past the age of 82 , then the decision to delay has potentially lost them money , Pianoforte says .

When you defer benefits annually past your full retirement age , you can get an 8 % increase on your full retirement age base amount until age 70 , Pianoforte says . “ If you were born after 1960 and decided to defer until 70 , you would receive 124 % of your original benefit as opposed to if you began collecting at age 67 .” ( Benefits don ’ t increase after age 70 .)

And since wealthy individuals will pay income tax on 85 % of their Social Security benefit payments , there ’ s a good reason for people in this cohort to wait : because they will increase their lifetime income while putting off paying income taxes , says Steve Parrish , co-director of the Center for

Retirement Income at the American College of Financial Services in King of Prussia , Pa . “ Since their benefits include the cost-of-living increases even while deferred , they ’ ll have an inflation-adjusted income they can ’ t outlive . They will eventually pay income taxes , but possibly when in a lower tax bracket .”

Another thing clients will have to take into account is what impact it will have on

their spouses if they take Social Security sooner or later . For instance , a male client might not expect to live into his 90s , maybe because of his family history . But his wife might expect to live into her early 100s . This is a good reason for the husband to delay his benefits , especially if the wife ’ s lower-income history means her own benefits won ’ t pay as much .

Another reason wealthy clients file for benefits early is that they think they can invest the benefits . But Parrish says research he co-authored indicates that it ’ s uncommon for investment returns to beat the implied benefit of delaying Social Security , even for long-lived retirees using relatively aggressive asset allocation .

Delaying Social Security is playing a game of smaller benefits taken earlier versus larger benefits one doesn ’ t live to claim . Clients need to live 12 to 14 years past the age of 70 to get rewarded for taking the maximum benefit , advisors say . Again , they lose money if they aren ’ t living longer .

Pianoforte adds that clients who ’ ve delayed Social Security benefits could turn

Clients need to live 12 to 14 years past the age of 70 to get rewarded for taking the maximum benefit , advisors say . ... They lose money if they aren ’ t living longer .

to withdrawals from their IRA instead . This would reduce the value of the IRA so the sting isn ’ t as bad when it comes time for required minimum distributions .

Pontius adds , “ Some clients only have retirement savings in pretax vehicles and use distributions only from these accounts for living expenses . In this scenario , a client should not wait to take Social Security because their entire benefit can only be taxed up to 85 %, versus 100 % from the pretax account .”

Above all , the wealthy should not treat Social Security as an afterthought . “ For some wealthy couples who live long lives ,” Parrish says , “ Social Security may be a million-dollar decision .”

— Jeff Stimpson

12 | FINANCIAL ADVISOR MAGAZINE | JULY / AUGUST 2023 WWW . FA-MAG . COM