Rich people may want to take social security at 62

I am always surprised to see how many wealthy individuals and families are neglecting one of the most important aspects of retirement planning: the huge amount of taxes they may have to pay on their social security benefits.

SEE ALSO: True or False: Test yourself on Social Security Basics

It's understandable. They do not depend on social security as the basis of their retirement like most Americans. For many retirees, boosting this monthly check can make or break their income plan. But those who have saved $ 1 million, or millions of dollars, in their portfolios have opportunities to do more with their money than most people think. These opportunities include reducing income taxes, reducing taxes on social security benefits, reducing health insurance premiums, deducting investment costs and more.

The question you should ask yourself is: am I involuntarily on a journey to allow decades of hard work and savings to erode taxes?

My company reviews hundreds of portfolios each year. It is frustrating to see people who have diligently saved their entire lives in retirement in a position that I call the "government plan". How and where have they saved money over the years? – possibly unnecessarily. They hold this position because they have not thought about how and when to withdraw money from these retirement accounts.

The social security rules of Thumb Are not Perfect

These days, too many people in the news and the world's financial advisers are taking Social Security at retirement age to get the full amount of their benefits and the fact that in the meantime longer, the benefit can increase by 8% per year. the age of retirement until the age of 70 years. Based on my expertise in social security, this unique advice may not be appropriate, especially for the rich.

The problem we are seeing is that everyone wants to increase their benefits on the front. But if there is no plan to increase those dollars by keeping more of your social security instead of giving them to Uncle Sam, then what's the point? For many, by the time they realize that they will give 20% to 30% of their social security in tax form, it is too late.

See also: 3 myths about the age of filing your Social Security

The telling story of a rich couple

Indeed, even if conventional wisdom indicates that, as far as possible, social security benefits should be reimbursed at age 70 – which can often be managed by well-paid people – an increasing number of 62 and using this income to preserve and build their nest egg. Here is a recent example to illustrate the concept. We advised a family where the husband was retiring at the age of 62. With the paycheck no longer arriving, they were both about to end up in the lowest tax bracket since their first job: the 10% slice.

The immediate problem is that they will, like many Americans, seek retirement from their IRA and 401 (k) retirement. These are usually the most important accounts in terms of amounts saved over the years of work. If this family did not use social security at age 62, it would have to take a heavy toll on pre-tax retirement accounts. On the basis of the monthly distribution rate needed to maintain their budget, these dollars – taxed at current income tax rates – would immediately place them in a higher tax bracket (potentially the 22% below tax rates). 2018 taxation).

If they had to go ahead and take their social security payments at the age of 62, the monthly distribution amounts needed from their retirement savings accounts would be considerably lower. As we will show, the story of this couple shows how retirement accounts of a person who is starting to retire can lead to a loss of growth opportunities of 20 to 30 years.

If they were to take their social security at age 62 – while they were aged 62 to 70 in a tax bracket of 10% – the amount of tax that 39, they would pay on these social security benefits would be minimal or even zero. There are cases where our families who have done a great job of saving on many accounts with true tax diversification on their portfolio will pay no tax on their Social Security benefits for most of their retirement (based on the limits which have been in force since 1983).

How to repay social security early

If this family were to defer social security payments from age 62 to age 66, it is estimated that they would defer nearly $ 146,000 in social security benefits over this period. They would be forced to withdraw money from their retirement account to support themselves by paying an expected $ 51,372 in federal taxes from age 62 to age 66.

Instead, if they chose to take their social security at the age of 62 in a range of 10%, the tax savings on that $ 146,000 would be considerable. By drawing early and minimizing taxes on pension and brokerage funds, the family had to pay $ 9,768 in taxes during the same period. That's $ 41,604 in tax savings early in their retirement career.

To go further, when we examined the balance of their retirement account by comparing the same rate of withdrawal, using the same rate of return on their assets (weighted average yield of the portfolio of 4.47%). Estimated numbers * spoke of themselves.

• $ 122,000 over age 65: If they were to take social security at the age of 62 compared to the age of 66, their combined pay at the age of 65 is estimated at 1.37 million of dollars. If they were to postpone Social Security to 66, their combined balance at age 65 is estimated at $ 1.248 million. That's a $ 122,000 difference: $ 122,000 more on their bank account at age 65 if they started taking social security benefits earlier.
• $ 144,000 over age 75: By moving to Social Security at the age of 62, the total balance of their account would have reached about $ 1.53 million at age 75. If they were to wait 66 years, the balance of their account was $ 1.386 million. That's $ 144,000 more on their bank account by taking Social Security earlier.
• $ 100,000 over 85: Now, at the age of 85: taking social security at age 62, the balance of their account at age 85 would reach $ 1.39 million against $ 1.29 million for social security at age 66.
• $ 44,000 over age 95: Finally, we considered a horizon of 30 years up to the age of 95 years. If they were to take their social security at age 62, their balance would reach about $ 1.14 million at the age of 95. The balance would be $ 1.096 million at age 95. This is a difference of $ 44,000, always positive.

If you're like me, I want more than $ 100,000 + in my retirement accounts in my early 60s, in the mid-70s, when I'm still active and able to travel and enjoy the fruits of my work. At the end of the day, claiming 62 as a living expense is potentially giving them $ 44,000 more at the end of life.

The Bottom Line: be thoroughly

As you can see, social security is a complex subject. To be informed. Talk to a financial advisor – a retirement specialist – about all the rules and strategies that apply to applying for benefits. You may also want to include a tax and / or lawyer in the conversation. Do not ignore this important retirement problem. Decisions about when to file and how to integrate social security into every aspect of your financial plan should not be considered insignificant or after the fact.

You have worked for years participating in the system. Is not it time that these dollars start working for you?

* These figures take into account federal taxes using the standard deduction, social security taxes, RMD, COLA and average inflation.

See also: Social Security 101: How to apply for benefits

Chris Heerlein, author of "Money Will not Buy Happiness – But It's Time to Find It", is a representative of Investment Advisors and Partner at REAP Financial LLC.

Comments are deleted in accordance with industry guidelines. Click here to read more and read more articles from the author.

This article was written by and presents the views of our contributing advisor and not the editorial staff of Kiplinger. You can check the advisors' files with the SEC or FINRA.