Social Security is by far one of the most popular government programs in the United States because it is critical for so many retirees’ financial security. In fact, a recent survey by Bankrate found:
- 77% of current retirees are reliant on Social Security to pay necessary expenses.
- 62% of current retirees say they are very reliant on Social Security.
- 53% of non-retired US adults expect they will need to use Social Security to pay for necessary expenses.
- 69% of non-retired baby boomers say they will be reliant on Social Security.
- 56% of Gen X’ers say they’ll be reliant on Social Security.
- 47% of all those surveyed expect to be very reliant on Social Security.
- 14% of non-retired Americans say they won’t be reliant on Social Security at all.
So, what about those who won’t need Social Security, the high net worth individual? Their Social Security can still be important to them for strategies to manage estate taxes or long-term care expenses.
There are more than 2,700 rules governing Social Security and most couples have over 500 potential filing scenarios. HNW couples will typically receive combined benefits exceeding $2 million over a 20-year retirement. They can often receive annual benefits exceeding $100,000 per year.
Because HNW people don’t need Social Security, common advice is to wait until age 70 to begin receiving benefits because that’s when you get the biggest payout. Every year you wait past your full retirement age (FRA) to begin receiving benefits you get a bonus called delayed credits. The bonus is 8% per year up to age 70. That’s a 32% increase. And, since HNW individuals pay tax on 85% of Social Security benefits, why not defer the tax by delaying to age 70? But if HNWs are going to use their Social Security for strategic purposes, they should look at it as a lifetime income stream, not a monthly check.
Estate taxes and Social Security
Often, the biggest financial issues for HNW people is not income taxes but estate taxes. With the estate tax exemption in 2025 at $27.98 million for a married couple, that couple is subject to a 40% estate tax on every dollar of their net worth above $27.98 million (or $13.99 million for single people).
One strategy is to use the Social Security benefit to help pay estate taxes. For example, let’s say a couple receives a combined benefit of $85,000 per year if they wait until age 70 to file for Social Security. Or, in this example, they choose to file earlier at full retirement age and take a reduced benefit that, after taxes, was $40,000. They could gift that $40,000 each year to an irrevocable life insurance trust (ILIT) and fund a $2 million life insurance policy to be held inside the ILIT which could then pay the estate taxes at their death.
Long-term care and Social Security
Or how about using the Social Security benefits to fund long-term care insurance? Since long-term care costs are not covered by health insurance plans or Medicare, you have to either self-insure or purchase LTC insurance. You can use your Social Security benefit to buy a traditional LTC policy or a life insurance policy with a LTC rider. Either way, you’ve created a tax-free pool of money to pay for long-term care without generating capital gains from taxable investment accounts or taking taxable withdrawals from retirement accounts
By leveraging the value of your Social Security benefits to fund a LTC insurance policy, or a life insurance policy with a LTC rider, you will have created a tax-free pool of money to help pay for long-term care expenses.
The old adage applies here: Don’t leave money on the table. Even if you’re a high net worth individual who doesn’t think you need your Social Security benefit, there are strategic, beneficial ways to make that money work for you.
This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors, all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investment Partners at 1-888-777-0970 or email us at info@alhambrapartners.com.
