When most people think about Social Security, they imagine it as a safety net—a lifeline for those who have spent decades working and contributing to the system. But for the wealthy retirees, Social Security is more than just a lifeline.
It can be a strategic tool, allowing them to enjoy more benefits than the average retiree, and they often take advantage of a little-known loophole. While this loophole isn’t illegal, it’s certainly not widely discussed or understood by the general public.
This article reveals the secret Social Security loophole that wealthy retirees use to maximize their benefits—and what you should know about it.
What is the Social Security Loophole?
The loophole that rich retirees use involves strategically timing when and how they claim their Social Security benefits. The main idea is to delay claiming benefits as long as possible. Most retirees begin collecting Social Security at the age of 62, the earliest eligibility age. However, the longer you wait to start collecting, up until the age of 70—the higher your monthly benefit will be.
This is where the “rich” retiree strategy comes into play. While the average retiree may begin claiming Social Security benefits as soon as they are eligible, wealthy individuals can afford to wait. They are often in a financial position where they don’t need the immediate income from Social Security, which allows them to hold off and allow their benefits to grow. The longer they wait, the higher their monthly benefit—up to 132% more than if they start at 62.
Why Does Waiting Matter So Much?
For every year a person delays claiming Social Security benefits beyond their full retirement age (FRA), their monthly benefits increase by 8%. The FRA is typically between 66 and 67, depending on when you were born. This 8% increase might not seem significant at first glance, but when compounded over several years, it can result in a substantial sum.
For instance, if a person’s monthly Social Security benefit would be $2,000 at age 66, delaying it until age 70 would increase the amount to $2,640. Over several decades, those extra thousands can significantly impact a retiree’s financial security.
While most retirees can’t afford to wait because they rely on that income for everyday expenses, wealthier individuals often don’t need to tap into Social Security benefits until later in life. They may have other income sources, investments, or pensions that allow them to delay drawing from Social Security.
Additional Benefits of Delaying Social Security
Aside from the 8% annual increase, delaying Social Security benefits can offer additional advantages for the wealthy.
- Increased Survivor Benefits: If you are married and you delay claiming your benefits, your spouse may be eligible to receive a higher survivor benefit in the event of your death. This means that by waiting, you’re not just securing a higher monthly payout for yourself, but also ensuring your spouse has a greater financial cushion after you’re gone.
- Avoiding Taxes on Social Security: For high earners, a significant portion of Social Security benefits can be taxed. In 2023, individuals with a combined income above $34,000 ($44,000 for married couples) may pay taxes on up to 85% of their Social Security benefits. By waiting until later to claim Social Security, wealthy retirees may be able to manage the amount of their benefits that are subject to taxation, especially if they’ve already reached a point where they have multiple income streams.
- Maximizing Lifetime Benefits: If you live longer than average, waiting until 70 to claim benefits could result in a significantly higher lifetime payout. For wealthy retirees with a longer life expectancy, waiting allows them to collect a larger amount over the years. This can be especially useful if they’re concerned about outliving their savings.
The Strategy: Defer and Diversify
The rich know that the key to wealth isn’t just about earning—it’s also about timing and strategy. This mindset applies to Social Security benefits as well. Instead of rushing to claim Social Security at the earliest opportunity, many wealthy retirees take a different route. They defer claiming, investing their money in other assets while waiting for their benefits to increase.
But the real magic happens when they diversify their income sources. They might have rental properties, business investments, or stock portfolios generating passive income while they wait to claim Social Security. This strategy allows them to draw on their wealth in a way that the average person simply can’t afford to do.
How You Can Use This Loophole
While this loophole is often used by wealthier individuals, it doesn’t mean that average retirees can’t take advantage of it too—if they plan ahead. If you have other sources of income or savings, and you’re still working, you might want to consider delaying Social Security as long as possible. The more you can defer your benefits, the higher your monthly payout will be when you finally do claim them.
That said, not everyone has the luxury of waiting. If you’re not sure whether delaying Social Security is right for you, it’s always a good idea to consult with a financial planner. They can help you decide when to claim benefits based on your specific financial situation and retirement goals.
Key Takeaways
- Wealthy retirees can maximize their Social Security benefits by delaying their claim until the age of 70.
- By delaying, Social Security benefits grow by 8% each year after reaching full retirement age.
- Delaying Social Security allows for increased survivor benefits, lower taxes on Social Security income, and potentially higher lifetime benefits.
- To take advantage of this strategy, you should have other income streams or sufficient savings to allow you to wait before claiming Social Security.
Though this loophole may seem like a secret weapon for the rich, it’s a strategy that anyone can use if they have the means and foresight to do so. The key is understanding the timing and the potential rewards of waiting to claim your benefits.
If you’re nearing retirement, now’s the time to evaluate your Social Security strategy and determine whether waiting until 70 might be the key to a financially secure retirement.