Why Some Wealthy Clients Should Claim Social Security Early

Instead of delaying benefits to “maximize” the monthly amount, Ahluwalia often helps clients claim earlier and redirect those payments to fund other planning goals. The strategy is less about squeezing every possible dollar out of Social Security and more about using it to support a broader wealth plan.

“When used strategically, Social Security becomes another lever for protecting wealth and planning across generations,” Ahluwalia said.

Here are highlights from our conversation, edited for lengthy and clarity:

THINKADVISOR: How did you come to specialize in doing fee-based Social Security planning? And how does that work fit in with OneTeam’s broader client service and business development strategy?

ASH AHLUWALIA: It’s an interesting story, because I’ve been doing retirement planning for 30 years now, and early on, there was essentially nowhere to go to learn about Social Security. You had to study the 2,700-plus rules all on your own directly from the tax code and legislation.

Eventually, I ended up getting two certifications, including certification from the National Social Security Advisors organization that was created by Marc Kiner and Jim Blair. The other one was the Certified in Social Security Claiming Strategies designation, run by the Corporation for Social Security Claiming Strategies in Boston. Both were really helpful.

My services complement what we do as an independent financial planning firm. We have experts on insurance, investments, estate planning, long-term care — all of it. We also have a specialist in Medicare planning. Our clients come to us for a complete financial plan across all these areas, and even though they are generally wealthy, Social Security is still an important element of the plan.

Generally, our clients are people approaching retirement and in retirement, typically with a net worth between $2 million and $10 million, but there are some smaller clients and outliers with up to $100 million.

My role is interesting, because I both serve our own clients and also offer my services on a one-off basis to other professionals like estate attorneys and CPAs who have loyal clients but lack expertise in the Social Security planning domain. That’s led to a ton of business development over time, because we’re connecting with these centers of influence and getting really great introductions to prospects.

I’m also getting called upon all the time to give presentations online and in person to big groups of CPAs. I’ve also presented to wealth managers at some of the biggest banks out there, so it’s been a real benefit to me and to the firm.

There is just so much demand for this kind of expertise, both from clients and from fellow industry professionals, so it’s been a great time for me to share my expertise and feel like I’m making a difference.

THINKADVISOR: You often speak about the important difference between “maximizing” wealthy clients’ Social Security benefit versus “optimizing.” What’s the difference?

AHLUWALIA: The difference is a big one, and there are a few factors at play under the surface that you need to take into consideration.

The first is that wealthy clients are often told by their trusted CPAs or estate planning attorneys that delayed claiming is always better for them. The thinking is that they don’t need the income starting at 62 or 65, and they’re just going to end up paying substantial taxes on their benefit once it starts to flow, so they should just wait until 70 to avoid that fate for as long as possible.

Well, that’s just letting the tax tail wag the dog, so to speak. When you really run the numbers, you realize you might be avoiding pennies in taxes while giving up dollars in income. Sure, you could defer to 70 to avoid tax today, but you’ll still pay taxes later. You may even end up getting potentially far fewer dollars if you end up having shorter-than-expected longevity. It’s just a one-sided view of the claiming decision.

So, that’s one consideration, but probably the more important point to discuss is that the claiming strategy that “maximizes” the monthly benefit does not necessarily fit the best into the overall financial plan for a couple that might have $10, $20 or $30 million — especially once you get to the level of wealth where you are facing a very real estate tax liability.

The individual cases can get pretty complicated, but the overall idea is to ask, how do I get the most amount of money sooner without giving up too much down the road? And then, what can I do with the benefit dollars that are coming in sooner in order to maximize the long-term amount of wealth?

Is there an opportunity to claim the reduced benefit now and use it to purchase life insurance inside an irrevocable trust? Can I use it to help cover future estate taxes, to make charitable gifts or to cover long-term care needs?

Frankly, I should add, a lot of clients don’t have faith that Social Security will always be there — or that they will really receive the promised benefits of delayed claiming. That’s another reason some people can legitimately decide to claim early. So is the expectation that taxes simply have to go up in the future, given the public debt and the funding gaps facing Social Security and Medicare.

The bottom line is that it can be perfectly reasonable for wealthy people to go with a strategy that would pay them $80,000 or $90,000 less over 25 years but which pays them more money up front that they can then deploy for other goals.

THINKADVISOR: How much more complex is the claiming decision for a very wealthy married couple with legacy giving goals compared with, say, a middle-income single beneficiary?

AHLUWALIA: It is more complex, but every Social Security claiming decision has its complexity. In every case, you always want to put the claiming decision under a microscope. For couples, that means making sure that you’re appropriately factoring in spousal benefits and survivor benefits, for example.

For the highly wealthy married clients, the exercise looks different, because the anticipated income from Social Security isn’t going to be needed to fund basic living expenses. You can get really creative in these situations, especially when it comes to life insurance or long-term care insurance.

For clients in that $2 million to $10 million wealth range, in particular, the life insurance and long-term care insurance discussion is highly relevant. This is a lot of wealth, yes, but the huge costs of acute medical care and of sourcing ongoing care for a sick or disabled member of the couple is one of the real risks of bankruptcy in retirement for these people.

So, rather than just looking at the “maximized” Social Security strategy, can we look at what claiming at 62 or 65 would look like in terms of using that additional income stream to pay for expanded insurance coverage? It’s a question worth asking.

THINKADVISOR: What about your wealthiest clients? How do they view Social Security? Is there a wealth level at which Social Security truly stops being important to the overall plan?

AHLUWALIA: That’s an interesting question, and it makes me think about one client who I’ve served who has a net worth of about $100 million. He’s married, with both spouses in pretty good health at age 66.

I asked him what his plan was for Social Security, and he told me his accountant had simply told him to delay as long as possible to avoid paying taxes on the income. He then confided in me that he was probably planning on just not claiming his benefit, because he didn’t think it was worth the time.

Well, my response to him was that he was going to leave as much as $2 million on the table for him and his spouse by failing to claim, and doing so would only cost him 15 or 20 minutes online. Even for a person with $100 million in wealth, that’s a meaningful number that could be used to do any number of things — buy life insurance, fund a charitable goal, whatever.

In another case, I had a highly successful surgeon in New York who had a goal of leaving $2 million to each of his grandkids. I showed him a strategy where we could start using his Social Security benefit to start funding trusts for them. The strategy wouldn’t “maximize” his own personal benefit, but that wasn’t the goal.

So the answer is really “no.” Social Security matters for all of these clients, even if it’s not a question of their standard of living or their chances of going broke in retirement.

Pictured: Ash Ahluwalia