Maximizing Social Security Benefits

By Chris Duderstadt

July 26, 2022

Maximizing Social Security Benefits

Key Points – Maximizing Social Security Benefits

  • There Are A Few Hundred Iterations for Claiming Social Security … Which Is the Best for You?
  • Looking at the Many Different Social Security Claiming Strategies Before Building Your Plan
  • When Is and Isn’t Social Security Taxable?
  • There Aren’t Any Redos with Claiming Your Social Security
  • 10 Minutes to Read | 20 Minutes to Listen

Figuring Out What Social Security Claiming Strategy Is Best for You

After making a return appearance to the Modern Wealth Management Educational Series two weeks ago to discuss Setting Up a Spending Plan for Retirement, Will Doty is back for more. Will joins Dean Barber again to talking about Social Security claiming strategies and why maximizing your Social Security benefit is a critical part of your overall financial plan.


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There Are Many Different Ways to Claim Social Security

Before jump right into talking about maximizing your Social Security benefit, let’s to a quick history lesson. Make no mistake about it, the Great Recession was painful period to go through. However, given the current market downswing we’ve been in, we have been able to look back on periods like the Great Recession and learn from them to help give people the highest probability of success with their financial plans. This is what we refer to as stress testing.

During the Great Recession, was there something that Dean and the rest of the Modern Wealth Management team felt like they were missing in the financial planning process that could help retirees and soon-to-be retirees. They went on to discover that the average 62-year-old couple with the same earnings history and life expectancy had more than 700 to 800 iterations in which they could claim Social Security.

“The difference between the best and the worst claiming strategies could be more than $100,000 of additional income,” Dean said.

While there was a lot that Dean learned about Social Security during that time, things have changed with Social Security over the past 14 years. Some of the best claiming during the Great Recession are no longer available. Therefore, keeping up with the latest nuances of Social Security has been very important Dean, Will, and everyone else at Modern Wealth Management.

“Even though there aren’t quite as many iterations of how a person can claim, there are still more than 500 ways to claim in most cases,” Dean said. “The difference can still be anywhere between $60,000 and $100,000-plus. Understanding that is very critical.”

Analyzing Social Security in a Vacuum

Maximizing your Social Security benefit is a crucial component to your financial plan, but there are some important things to know about Social Security before even building your plan. Will thinks of this process as analyzing Social Security in a vacuum.

“It’s breaking down all the numbers to understand every claiming option that you have for every month from the time you’re 62 all the way until you’re 70. Along with understanding your Social Security, we want to understand your spouse’s Social Security,” Will said. “Ultimately, there’s a widow’s benefit. We want to make sure that we’re maximizing the Social Security benefit for all three cases. What might or might not make sense in your plan?”

So, there are a few pivotal factors to consider when determining how to maximize your Social Security benefit. Your current health and life expectancy based on your ancestry are at the top of that list.

What Information Is Necessary to Analyze How to Maximize Your Social Security Benefit?

Before you start running through the many different Social Security claiming iterations, here are a few other things that you should mention to your advisor while determining your strategy.

“We need one of two things. We need all your earnings history to calculate what your full retirement age benefit is or just your full retirement age benefit,” Will said. “From there, we already know what all the math and calculations are to calculate all the other benefits. Our financial planning tool helps us with this. It starts there with information like your date of birth, full retirement age benefit, and earnings history.”

Building Your Retirement Plan and Analyzing the Benefit

Your Social Security statement provides all that data, which you can get online at any time. After analyzing all your different possible iterations of how to maximize your Social Security benefit, the next step is to build your plan. As you build your plan, you take those best iterations and overlay them on top of the plan. That way, you can see if it improves or hurts your probability of success if you delay claiming Social Security.

“That’s why we need to have all those important discussions about mortality, health, and all those different pieces,” Will said. “A lot of people are afraid that Social Security is going to implode in the 2030 era. Will that be the case? I don’t know.”

That’s an uncomfortable scenario to think about, but it needs to be factored in as well. Hopefully it won’t be the case, but let’s say that there’s a 25% reduction in your Social Security that, our financial planning tool can model that. You also need to keep all the 500 or so iterations in mind so you know you’re maximizing your Social Security benefit.

How Maximizing Your Social Security Benefit Relates to Your Spending Plan

As mentioned earlier, Dean and Will discussed setting up a spending plan for retirement in the last educational series event. So, ask yourself, how does maximizing your Social Security benefit impact your spending plan and doing everything you want to do in retirement?

Like we talked about with setting up a spending plan, what happens if your spouse passes away? We know that the smaller of the two Social Security checks is going to go away,” Will said. “That’s why you think about the widow’s benefit before making that claiming decision. It’s not just about yourself. It’s about both spouses and we want to understand those dynamics.”

Speaking of that spending plan, Social Security claiming strategies tend to be more relevant to those who have saved for retirement. That way, Social Security won’t be the only source of income during retirement. If it is going to be your only income in retirement, you know you’re going to start claiming Social Security once you retire and effectively throwing a lot of those options out the door.

Social Security Benefits and Taxes

Dean doesn’t want people to get confused about this and think that you can maximize your Social Security and get more out of it if it’s your only asset.

“Those people are going to turn it on because they have no other money to spend,” Dean said. “However, it is super effective for people who have saved a decent amount of money. That Social Security is going to be a part of their overall income in retirement.”

If you are going to rely on Social Security as your main source of income in retirement, you don’t need to spend much time worrying about taxation planning. Why? Because Social Security by itself is tax-free.

But when you get other income sources coming into play, that all changes. You then need to understand the impact of taxation on Social Security. Is some of it going to be taxed? Is up to 85% of it going to be taxed? That can change your decision of how to build out your plan.

“A huge part of that would be thinking about doing Roth conversions. Should you do one, and if so, should you turn on Social Security now?” Will said. “Would doing that take up room from doing those conversions? Or should you delay so you can get more money moved over while the tax rate is low and get that money over to tax-free status?”

Don’t Wait Until Your Retirement Date to Consider Social Security

Tax-free is obviously a good place to be. Dean has helped create many plans that allow people to have $60,000 to more than $100,000 of annual spendable income and Social Security still won’t become taxable. However, some future planning is needed to accomplish that.

“That’s important because you shouldn’t wait until the day you retire to think about how Social Security is going to fit into your plan. You need a five-to 10-year window prior to retirement to begin to play with all these different options,” Dean said. “How these different options play out in the plan is going to affect how much you need to save and where you should be saving it to. Should you be going to the Roth portion of your 401(k) or traditional? Do you have money in after-tax accounts that you can live on and therefore do some Roth conversions and delay Social Security?”

Hopefully you can see how this can get very complicated without assistance from a financial professional. We can’t emphasize enough how the difference between the best and worst Social Security claiming strategies could be in the six-figure range.

Taxable, Tax-Free, and Tax-Deferred Buckets

The scenario that Will always finds interesting is when someone wants to claim now because they think it will help them long-term by not having to take money out of their 401(k). What they don’t understand, though, is that the tax-deferred asset is continuing to bloom. So, they might not only have a tax nightmare in their future, but Medicare is income-tested.

“I think a lot of people miss that,” Will said. “They may actually turn on their Social Security early when it may have been better for them to delay just because of those two factors—tax and Medicare.”

A Story About Tax Planning

Dean has an example about this that played out just after the Great Recession. He recalls doing a radio show on tax planning where the opportunity was presented to America’s Wealth Management Show listeners to come in for a complimentary consultation. After that episode, there was a person who met with Dean and showed him that his tax returns for the past two years were both zero. He didn’t think that he could do any better than that, but it turned out that he could.

“Zero is a good number. I like that. He was 64 at the time and had already started claiming Social Security, so I asked him if that’s what he’d been living on,” Dean said. “He said he wasn’t and that he had a bunch of cash in the bank and had been spending that. That cash wasn’t taxable and he wasn’t reaching Social Security taxation limits. That was good, but I asked him if he had any IRAs and he had about $2 million in IRAs. Based on his tax return, he could’ve taken around $30,000 out of his IRA the previous year and paid zero taxes on it.”

So, Dean asked him why he didn’t take that out. He didn’t because he’d never had that conversion with his CPA. Dean did a few more calculations and found out that he could’ve converted roughly $100,000 over those last two years from a traditional to a Roth IRA and paid less than $11,000 to do that.

Moral of the Tax Planning Story

After finding that out, Dean assumed that since he had $2 million in his IRAs that his earnings while he was deferring put him in a higher tax bracket than 11%. But his CPA didn’t talk to him about that either because they didn’t know he had an IRA.

“He should’ve been making large conversions, delaying Social Security, and living off the cash at the same time. In doing so, it probably would’ve saved him more than $250,000 in taxes, assuming he lived to 90,” Dean said. “However, we adjusted some things and redid the plan. The point is that people need to think about this. Social Security is a big piece of this decision. He thought he had it all figured out, but didn’t understand that this tax timebomb was looming in that ballooning IRA.”

When Should You Start Building Your Retirement Plan?

After giving that example, Dean asked Will how long before retirement that he thought people should really start getting serious about retirement planning.

“I would say 10 years or more. I’d say a minimum of five years before retirement,” Will said. “At five years, you’re cutting time very short to build out your plan. At 10 years or more, we can make some very impactful mid-course corrections to put that person in a better place when they retire.”

Understanding Tax Diversification

Another subject that applies here that Will and Dean also covered in the Setting Up a Spending Plan for Retirement webinar is tax diversification. You need to understand how Social Security is taxed and how it plays with other forms of income.

“I think it’s a shame that a lot of people think that they don’t need to start talking to a CFP® Professional until they’re a year or two out from retirement,” Dean said. “They may that since a vast majority of their money is in their 401(k) that they don’t have enough money outside of it for a CFP® Professional to be interested in talking to them, but that’s simply not the case. You need to start early. I always say that you can create your own future by the decisions that you make today.”

Talking about the importance of starting retirement planning early made Will think of a whole family who he works with in their retirement planning. He’s impressed that the parents have done a tremendous job of talking to their kids about finances when they were young. Those adult children aren’t much older than Will and have just about as much saved for retirement as their parents do. Will worked with them on their savings plan once he met with them, and it’s going to allow them to retire early.

Achieving Financial Independence

When it comes to retirement, Dean likes to think of it as achieving financial independence. That means that you’re doing what you’re doing every day because you want and not because you need a paycheck. There are people, including Dean, who can retire but choose not to because they love what they do. Maximizing your Social Security benefit plays a big role in achieving financial independence.

To learn more about how to maximize your Social Security benefit, we have a couple of episodes of our Guided Retirement Show podcast that could come in handy. You can view them below.

There Are No Redos with Social Security

The key takeaway here is to look at how to maximize your Social Security benefit well before you retire.

“Social Security planning and financial planning overall needs to be fluid. For example, let’s say we’re building a plan for a couple and one of them needs to delay until 70,” Will said. “Is that going to happen? I don’t know. But I always tell people when I meet with them is that every year, we’re going to talk about it. We’re going to say, ‘Is this the year or is it not? Can we continue to delay? Here are the reasons to delay and not to delay.’ Once you decide, you do it and don’t look back. You can’t change it.”

Either way, it’s critical to have a financial plan in place so you’re not making an immediate and/or emotional decision about your Social Security. Your retirement date shouldn’t be synonymous with the date you claim Social Security. Those are two different life events. The only exception is if Social Security is going to be your only retirement income.

“When you start running all the iterations side by side, you can see if it increases or decreases the amount you can spend in your lifetime and your legacy,” Dean said. “You’ll come up with the optimum strategy, but you need to update it every year.”

Look at How to Maximize Your Social Security with Our Financial Planning Tool

As we wrap up with discussion on maximizing your Social Security benefit, we’re giving you the opportunity to look at what iterations could be best for you from the comfort of your own home by using our financial planning tool. It’s the same financial planning tool that our CERTIFIED FINANCIAL PLANNER™ Professionals use. You can use it by clicking the “Start Planning” button below.

Start Planning

If you still have a lot of questions about how to maximize your Social Security or need some guidance with our financial planning tool, that’s perfectly OK. You can reach out to us with those questions by scheduling a 20-minute “ask anything” session or a complimentary consultation with one of our CERTIFIED FINANCIAL PLANNER™ Professionals. We can meet with you in person, virtually, or by phone.

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.