Conventional retirement planning often promotes delaying Social Security benefits until age 70, highlighting advantages like increased lifetime income through delayed retirement credits. However, this approach may not be ideal for high-net-worth individuals, as Social Security constitutes a small fraction of their overall wealth. When considering factors like taxes, opportunity costs, and lifespan probabilities, delaying benefits might serve more as longevity insurance rather than a financially optimal decision, possibly diminishing after-tax wealth and liquidity.
Financial advisors face the challenge of presenting this trade-off effectively to affluent clients with substantial portfolios that already cover most longevity and income risks. For those individuals, claiming benefits early may not align with their earnings potential, especially since benefits can be reduced due to an earnings test prior to reaching full retirement age (FRA).
An alternative strategy involves claiming Social Security at age 62 or FRA and investing the benefits conservatively. By adopting a focused asset mix such as high-quality fixed income, individuals can accumulate significant capital by age 70. This capital is liquid and can be utilized for various financial goals, including reinvestment or estate planning.
The primary rationale for delaying benefits centers on longevity risk; individuals could benefit from higher guaranteed income if they live significantly beyond average life expectancy. However, the potential for greater after-tax capital from early claiming often outweighs these long-term considerations, especially for high-net-worth retirees.
In conclusion, early claiming of Social Security, particularly paired with sound investment strategies, may offer a better avenue for maximizing after-tax wealth for affluent individuals. Advisors should balance these decisions against the varying risks of longevity and client-specific circumstances.
Why this story matters
- Challenges conventional wisdom by presenting alternative retirement strategies for high-net-worth individuals.
Key takeaway
- Early claiming of Social Security, when coupled with conservative investment, can maximize expected after-tax wealth for affluent retirees.
Opposing viewpoint
- Delaying Social Security benefits is viewed by some as essential for long-term financial security and income stability in later retirement years.
