Check out our video on this topic here!
What if the cookie cutter retirement advice you’ve been following for years could be costing you a significant sum of your wealth?
The “wait until 70” social security strategy that many financial folks speak about could come with unintended consequences.
In the case of our fictional friend John, a 62 year old recent retiree who saved $1 million in retirement savings, he learned this through watching his friends face hardship during crashes in the stock market.
So today, we wanted to discuss why it is important to have a specific plan for your individual situation rather than following broad based advice.
Here’s what common advice on social security may neglect to tell you: For some retirees, claiming social security at 62 doesn’t just provide immediate income- it can actually come with a multitude of other potential benefits.
What made John’s situation different here? He wasn’t just the average retiree. With his million-dollar portfolio, mortgage-free home, and a small pension covering about 30% of his basic expenses he could be seen as the perfect candidate for delaying benefits.
When he first consulted with a financial advisor, he received the standard advice: "Wait until 70 to maximize your Social Security benefits. You'll get an extra 8% for each year you delay after your full retirement age."
But what this advisor completely missed was how early benefits could potentially help John deal with his biggest fear.
His primary concern was market volatility after witnessing friends lose significant portions of their retirement savings during both the 2008 financial crisis and the COVID market downturn.
The math seemed straightforward. At 62, John would receive about $1,800 per month. If he waited until 70, that amount would increase to approximately $3,100 monthly, a difference of $1,300 per month or $15,600 annually for the rest of his life.
But this situation isn’t just about the size of your monthly income. It’s also about what happens to your entire portfolio during the critical early years of retirement.
Have you heard about sequence of returns risk?
It’s a technical term where the returns you experience in the early years of retirement could have a disproportionate impact on your long-term financial situation if not taken into account prior.
What John found out here, shocked him. By taking Social Security at 62, John needed to withdraw a total of $21,600 less from his investment portfolio each year.
But here is the revelation that he found to be even more of a shock. By age 85, John's investment portfolio was projected to be $132,000 larger with the early claiming strategy, despite receiving smaller Social Security checks for over 20 years.
This preservation of capital during the crucial early years of retirement had a compounding effect that traditional break-even analysis completely misses.
You might be wondering, "But what about market downturns? Doesn't this strategy expose you to more risk?"
In 2022, when markets plunged nearly 20%, John had a secret weapon that other retirees delaying their social security might not- flexibility.
He temporarily reduced his portfolio withdrawals even further, relying more heavily on his Social Security income when his investments were down.
This flexibility can give you options during market turmoil instead of forcing you to sell investments while they might be on the decline.
But the financial advantages didn’t stop there. Something that many basic financial calculators neglect to take into account is the potential for substantially higher tax ramifications a bit later in retirement.
In John’s case, upon turning 73, he’ll face mandatory withdrawals from his pre-tax retirement accounts know as Required Minimum Distributions.
For those who delay Social Security until 70, these RMDs combined with those larger Social Security checks create a perfect storm of unexpected taxation.
Something to be aware of is that there are tax thresholds specifically for Social Security benefits and unfortunately planning conversations might skip over this factor.
For married couples filing jointly, benefits become partially taxable when combined income exceeds $32,000 and when combined income passes $44,000, up to 85% of benefits become taxable.
In the event you are unaware, "Combined income" includes your adjusted gross income, non-taxable interest, and—critically—half of your Social Security benefits.
Let’s walk through the math here: If John waited until 70, his annual Social Security would be $37,200, with half ($18,600) counting toward combined income.
Add his $30,000 pension and roughly $40,000 in RMDs at age 73, and his combined income reaches $88,600—pushing him well above the threshold where 85% of his Social Security becomes taxable.
But, by claiming at 62, John created a completely different scenario which helped him navigate this potential issue.
John took things a step further with a strategy that could be considered a road less traveled.
During those lower-income years between 62 and 72, he strategically converted portions of his traditional IRAs to Roth accounts each year.
He paid taxes at lower rates than he would face later, which in his case, dramatically reduced his lifetime tax burden.
By age 72, his traditional IRA balance was significantly smaller, resulting in lower required distributions and therefore lower taxable income for the rest of his life.
But here's what makes this truly powerful—this approach created tax diversification through systematic Roth conversions.
John now has a tax-free bucket of money for his later retirement years, giving him flexibility to manage his tax situation as life changes over time.
Now I can hear some of you saying, "But what if I live a really long time? Don't I lose out on all that extra Social Security money by claiming early?"
This brings us to the third factor in John's decision—one that goes beyond spreadsheets and tax codes and might be the most important consideration of all.
What's the actual value of having an extra $1,800 per month in your 60s versus an extra $3,100 in your 70s?
The answer in John’s situation reveals something profound about how one may think about retirement.
Have you ever considered that money itself has different values at different stages of life?
This isn't just philosophy—it's economic reality. Think about it: a concert ticket has tremendous value before the show but becomes worthless afterward. Similarly, retirement dollars have different "utility values" depending on when you can access them.
Money in your active early retirement years can purchase experiences that may not be physically possible later on, making its utility much higher during those active years.
The stream of income provided by Social Security allowed John to truly enjoy his retirement instead of constantly worrying about market volatility. He could focus on making memories rather than monitoring his portfolio.
Beyond the math and spreadsheets, what John gained was perhaps the most valuable asset of all—genuine peace of mind during a time when he could most enjoy it.
That extra stream of dependable income during his most active retirement years provided security that no delayed benefit could match.
The Final Word:
While the mathematics of delayed claiming might work out on paper for someone who lives into their 80’s or 90s, spreadsheets can't measure the joy of holding your grandchild's hand at their college graduation or the freedom of exploring the world while you're still able.
Now, let’s be clear: this strategy isn't right for everyone and depending on your personal situation, maximizing Social Security benefits might still be your priority.
But for many retirees who have amassed savings in their retirement or investment accounts, the conventional wisdom often fails to account for the full financial picture.
Thanks for reading!
- The Rockline Team
Disclaimer:
Rockline Wealth Management (RWM) is a registered investment adviser located in Islip Terrace, NY. RWM is registered with the U.S. Securities and Exchange Commission. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission.
Rockline Wealth Management does not offer tax or legal services. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
Rockline Wealth Management is not associated with Medicare or any governmental organization. All information presented is believed to be factual at the date of publication.
All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's investment portfolio.
Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. The opinions expressed and material provided are for general information, and should not be considered a solicitation of financial advice or for the purchase or sale of any security.
Real-life and fictional examples given in this blog should not be viewed as guaranteed outcomes when investing. Past performance is not indicative of future results and every individual’s investment circumstances are different. Individuals should consult their financial professional before implementing their investment plan.