High Earners Miss Out on $2.1 Trillion in Social Security Benefits

Current retirees are set to forfeit a staggering $2.1 trillion in potential wealth due to suboptimal decisions regarding their Social Security benefits. This finding comes from the study titled “The Retirement Solution Hiding in Plain Sight: How Much Retirees Would Gain by Improving Social Security Decisions.” Many individuals, particularly high earners, often underestimate the significance of Social Security in their overall retirement planning.

Understanding Social Security is crucial, as the timing of claims can significantly affect the size of monthly payments throughout retirement. According to Allen Harris, owner of Berkshire Money Management, a poor decision could cost high-earning professionals up to $24,000 annually. This highlights the importance of making informed choices when it comes to Social Security.

Common Mistakes in Claiming Social Security

In his recent article, “Social Security Mistakes High Earners Often Make (and How to Avoid Them),” Zack Marcotte, Director of Financial Planning at Berkshire Money Management, outlines several mistakes that retirees commonly make.

One prevalent error is aligning Social Security claims directly with retirement dates. For instance, consider a couple named Casey and Sam, aged 64 and 66. With $3.5 million in retirement savings and an additional $600,000 from a property sale, they contemplated claiming benefits immediately upon retiring. However, such a move could reduce their monthly payments for life. By delaying their claims until age 70, their benefits could rise by nearly 27 percent, allowing them to maximize their income while maintaining their lifestyle.

Another significant mistake is delaying Social Security without factoring in personal longevity. While waiting until age 70 can maximize monthly benefits, individuals with health concerns or shorter life expectancies should consider claiming earlier. A thoughtful approach involves calculating the breakeven point, where benefits from delaying surpass those from claiming early.

The Importance of Strategic Planning

High earners also frequently overlook the tax implications of their Social Security benefits. Up to 85 percent of these benefits could be taxable at ordinary income rates, pushing retirees into higher tax brackets. To mitigate unexpected tax burdens, individuals should adopt a proactive strategy, managing their taxable income through careful withdrawals from retirement accounts.

Moreover, many retirees overestimate the role of Social Security in replacing pre-retirement income. The maximum benefit at age 70 is projected to be around $5,108 per month in 2025, which only covers about 30 percent of a $200,000 annual income. To achieve financial stability, retirees should integrate Social Security into a broader income strategy that includes pensions and tax-efficient withdrawals.

Spousal and survivor benefits are also critical considerations. The timing of a Social Security claim can significantly impact a spouse’s financial stability after the other partner’s passing. Delaying the higher earner’s claim until age 70 can substantially enhance survivor benefits, ensuring continued support for the surviving spouse.

In 2023, approximately 63 percent of retirees receiving Social Security benefits collected reduced amounts. This statistic underscores the necessity of strategic planning when filing for Social Security. Optimizing claims can lead to significant lifetime benefits, contributing to a more secure retirement strategy.

Allen Harris leads Berkshire Money Management, which manages over $1 billion in investments. Data referenced in this article is sourced from credible third parties unless otherwise noted. The insights provided aim to educate on the importance of informed decision-making regarding Social Security for retirees. For inquiries, contact Allen at [email protected].