One of the toughest questions eligible seniors will contend with is deciding what age is best to take Social Security benefits. Since there is no one-size-fits-all guideline (i.e., we all have variables, such as income, health, marital status, and so on, that make us unique), there's always that thought lingering in the back of our minds of whether we've made the right claiming decision or not.
Further complicating matters is that we (thankfully) don't know our expiration date. If we did, it'd be easy to ensure that we're always making the optimal claiming decision. But since we don't, we have to lean on these aforementioned variables when deciding the best time to take benefits.
While this decision is particularly important for those folks who will be reliant on Social Security income to make ends meet, the wealthy can also feel the impact of their claiming decision. Keeping in mind that there is no perfect claiming strategy, here are two good reasons why the rich could be smart for waiting as long as possible and taking Social Security at age 70.
Image source: Getty Images.
Increased longevity yields bigger payouts
As you may already know, Social Security benefits can begin at age 62, or any point thereafter. However, retired workers have incentive to wait, with an approximate 8% increase to their monthly payout for each year they hold off, up until age 70. Factoring in work history, earnings, and a person's full retirement age -- i.e., the age one becomes eligible for 100% of his or her payout, as determined by birth year -- waiting to claim until age 70 can generate an individual a lot of extra income each month. Of course, waiting isn't always the best course of action.
However, when it comes to the wealthy, waiting until age 70 could actually be the best decision. The reason is simple: The well-to-do have longevity on their side.
Generally speaking, the rich have minimal or no financial constraints when it comes to getting preventative medical care, emergency care, and prescription medicines. By comparison, lower-income individuals and families may not have the same access to preventative care and prescription medicines. This had led to a defined gap in longevity between the well-to-do and low-income people.
In other words, the rich have a higher probability of living longer than the average life expectancy in the U.S., which is close to the pivot point that decides whether claiming early, in the middle, or late, will generate the highest lifetime benefits. With longevity on their side, claiming later should result in a substantially higher lifetime payout (as well as maximum monthly payout) for the wealthy.
Image source: Getty Images.
Lower taxes (at least for eight years)
However, it's not just about what the rich would be getting each month from Social Security. It's also about what they'd get to keep.
As a refresher, Social Security benefits are taxable if recipients earn over certain income levels. If a single filer's modified adjusted gross income (MAGI), plus one-half of benefits, exceeds $25,000, or $32,000 for a couple filing jointly, then up to half of a person's or couple's benefits can be subjected to federal taxation. This initial tier of taxation was implemented in 1984 after the Reagan administration signed it into law in 1983.
The Clinton administration added a second tier of taxation in 1993 that taxes up to 85% of benefits if a single filer or couple exceeds $34,000 or $44,000, respectively, using the same MAGI plus one-half benefits formula. In short, the rich are almost certainly going to pay tax on their Social Security benefits.
By holding off on their filing until age 70, the wealthy are ensuring that, for at least eight years between age 62 and 70, they won't be on the hook for any taxation tied to Social Security benefits received.
Image source: Getty Images.
There's one risk to this strategy
Of course, every claiming strategy has risks, and waiting until age 70 does have one notable risk for the rich. Namely, congressional change.
If the Social Security program were to continue as it is now without any changes, waiting would almost certainly work out in favor of the well-to-do more often than not. But continuity at the congressional level isn't given.
According to the newest Social Security Board of Trustees report, the program is facing a whopping $13.9 trillion cash shortfall between 2035 and 2093. That's because Social Security's nearly $2.9 trillion in asset reserves will be completely exhausted by 2035. With this shortfall inching closer, it's up to lawmakers to act to shore up the Social Security program.
Pretty much the only course of action that's unacceptable at this point is allowing the program to continue along its current path. Additional revenue could be raised, expenditures could be cut, or some combination of the two could be enacted. The point is that it's quite possible future benefits could be reduced, which would make waiting eight years to finally begin taking their payout a potentially bad idea for the rich.
Furthermore, it's always possible that lawmakers could target the wealthy, who are less likely to lean on their payout as a necessity for retirement. Donald Trump and Democratic presidential front-runner Joe Biden have both loosely brought up the idea of means testing, which would institute income thresholds whereby Social Security benefits would begin to be reduced, or possibly even phased out in their entirety.
The potential for change on Capitol Hill is the greatest threat to the wealthy's "claim at 70" strategy. But is that enough to dissuade the rich from claiming late? That's up to the well-to-do to decide.
More From The Motley Fool
- Here's How to Get the Maximum Social Security Benefit
- The $16,728 Social Security Bonus You Can’t Afford to Miss
- 5 Top Dividend Kings to Buy and Hold Forever
- Is Social Security Taxable?
The Motley Fool has a disclosure policy.
This article was originally published on Fool.com