Most advisors who work with retirees, or soon to be retirees, do some sort of Social Security planning. Your goal is to get the most out of the system for your clients based on several factors including: health status, life expectancy, need for income, whether the client plans to work, and survivor needs. Unfortunately, nobody can predict with certainty how long they will live. Regardless of the filing strategy selected, the break-even tends to be close to life expectancy. This is to be expected; the Social Security actuaries have set the rules so that everyone - who lives to normal life expectancy comes out about equal.
The results change dramatically when you include tax planning into the analysis. Let's consider a very simple situation. Bill and Sally Sample each have of a monthly Social Security benefit of $2,500 ($30,000 annual) and are each distributing $20,000 annually from their IRAs. They are Colorado residents; Colorado is about in the middle of the states that tax income. Bill and Sally are both 67.
Of their $60,000 in total Social Security benefits, only $27,590 is taxable. This gives them a federal AGI of $67,590. Based on their age, their standard deduction is $27,800, leaving them with only $40,300 of federal taxable income. Their federal tax liability is $4,441. Due to the Colorado pension deduction they will owe no state income taxes. Their net after tax cash flow is $95,559.
Now, let's delay both benefits until age 70, reducing the IRA distributions to get to the same cash flow. As you know, this increases each benefit by 24%, giving them each a benefit of $37,200. To reach the same cash flow, they will only need to distribute $11,300 each from their IRAs. They increased the benefits by a total of $14,400, but were able to reduce distributions by $17,400. Their tax liability drops $4,441 to $1,423. Their taxable Social Security is only $19,430 despite having a larger benefit.
The obvious question you are probably asking is, "Okay that's great, but what do they live on until age 70"? The most obvious place would be non-qualified savings or investments. If none are available then you should like at their projected RMDs; if they are projected to exceed their income need, it might be beneficial to draw them down while delaying benefits. The last variable to look at is the distribution rate percentage of their IRAs. If it is much over 4%, under the initial plan, I would suggest they lower their income expectations or work longer.
If they don't have the means to delay both benefits, you may want to encourage them to delay at least one. This will also result in lower distributions (and lower taxes) and will also give them a higher survivor benefit.
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