Perhaps one of the most frequently asked questions we hear in estate planning conversations is, "When should I take Social Security?". This concern stems in part from people living increasingly longer with each generation; therefore, the decision's impact can be felt over decades rather than years. The United States Census Bureau estimates that one out of every three people who live to age 65 will survive to age 90 and beyond. This means detailed financial planning is required to maintain sufficient income to live comfortably for several decades in retirement. But when approaching retirement, financial decisions, such as when to apply for government benefits, can be overwhelming. The Social Security Administration routinely mails statements to individuals with projected benefits at various ages. Missing from the correspondence is any insight to help guide recipients to make the best choice for their personal situation.

As founding attorney Joe Donohue explains, the question is best answered after weighing many factors in developing an individually tailored strategy for the future. "Without a crystal ball, there is no rule of thumb or one-size-fits-all answer for when it is most beneficial to claim benefits," says Donohue, "we have to analyze the tax situation and estate planning objectives to create a strategy that optimizes the result for each client." 

How Does Social Security Work?

Social Security payment projections are available on the Social Security Administration's website at ssa.gov. Eligibility to claim benefits currently begins at age 62. The payment received for the remainder of your life varies depending on when you choose to start receiving the benefits. By age 66, you are considered at full retirement age, receiving benefits based on your lifetime earnings. At ages 62-66, payments are reduced by up to 30% to account for early receipt of the funds. After age 66, you accrue 8%, plus a cost-of-living adjustment, in each year that you defer benefits until age 70. For example, waiting four years, from age 66 to 70, results in 36% more benefits, plus inflation adjustments, potentially totalling 50% or more in additional benefits paid out each month. Importantly, once you start receiving benefits, you can cancel payments only once within the first 12 months of being approved if you change your mind. This makes the timing of claiming benefits critical.

Factors to Consider

The decision of whether to apply for Social Security at age 62, 70, or any age in between is a personal decision dependent on the following factors:

• Income streams and assets
• The health of you and your spouse
• Family medical history
• Other investments
• Income and estate tax considerations

At first glance, it appears financially beneficial to wait until age 70 to obtain the maximum payment amount; however, it may not be advisable in every situation.

The benefits a spouse may receive significantly impact the most beneficial time to apply. For most spouses who are healthy with a similar level of benefit, the recommendation is to wait as long as possible. On the other hand, when there is a substantial difference in ages between spouses, it is generally advisable for the younger spouse to take the benefit earlier. This is because a surviving spouse at full retirement age can elect to receive the greater of their benefit or the total amount of their deceased spouse's benefits. Before full retirement, the surviving spouse can receive 71.5-99% of the deceased spouse's benefit.

All else being equal, a spouse with less earnings would generally want to take Social Security earlier than the spouse with greater earnings because the 8% annual increase of deferring payments is greater for the higher wage earner. For example, a younger spouse serving as a homemaker for much of the marriage and having a smaller benefit will not realize a drastic yearly increase to justify deferral.

Another factor is life expectancy based on medical history and family longevity. In the event of a diagnosis of a terminal illness, most apply for Social Security as soon as possible to enjoy their benefits while still living. Genetic illness or disease are also considerations in deciding to collect benefits early. According to the Alzheimer's Society, an eight-to-ten-year life expectancy is anticipated following an Alzheimer's diagnosis before age 80. Early signs of dementia, therefore, may trigger the need for Social Security income sooner to be allocated to the cost of long-term care. 

Regardless of the financial implications, some people may choose to collect Social Security for emotional or celebratory reasons. In retirement, extra money comes in handy when buying a long-awaited vacation home or funding travel. After decades of hard work, some people decide to take Social Security earlier rather than later to meet personal goals or obtain material items postponed during their careers.  

Tax Consequences

Continuing to work while taking Social Security or anticipating large payments from the sale of a business, real estate transactions, or a windfall from an inheritance can carry significant tax consequences. When expecting sizable payments, deferring Social Security until after payments cease is recommended to avoid subjecting Social Security payments to additional income taxes in a higher tax bracket. It may make more sense first to spend down assets that are subject to hefty taxation. As Donohue explains, "An IRA is subject to both income and estate tax. Your heirs can end up paying 75-80 cents on the dollar in tax. For those who are subject to state or federal estate tax, it may be better to get that money spent before relying on Social Security."

Offsetting deductions are also considered in the tax equation when taking Social Security. A sizeable charitable donation or a business loss can shelter income. It is a good time to consider taking Social Security, knowing it will be subject to less tax and avoiding years with higher tax liability.

When Should I Contact an Attorney?

Donohue recommends that as soon as you start to consider retirement or are in your early 60s, you should investigate your Social Security options. "The analysis is done in a fact-sensitive manner and is not something you can decide based on a tip from a friend or gossip you hear at the country club," Donohue explains, "We need to sit down together, working with your accountant and investment advisor, and crunch numbers because if you live a long time, it could mean tens or hundreds of thousands of dollars being left on the table inadvertently."

A lawyer is best equipped to work with your other advisors to formulate and periodically revise tax and estate plans. Unfortunately, it is not uncommon to experience drastic life changes later in life, such as receiving a terminal diagnosis or experiencing the sudden and unexpected death of a spouse that will dictate changes in Social Security planning. An attorney can swiftly adjust benefit strategies to lessen the financial impact of unanticipated life-altering events. "The only person that is going to keep tabs on the intricacies of state and federal income and estate tax laws and how they interact with a client's changing circumstances is an attorney," Donohue advises, "We help clients understand how the tax laws impact their investments and benefits to make the best financial decisions for their future." 

After working in the New York and Paris offices of a large international firm, attorney Joseph Donohue opened his own firm in 2007. In 2010, he acquired his first practice from a retiring solo practitioner, doubling the firm’s revenue. In 2017, he acquired the office of O’Connell & Riley with his business partner, Kristin A. Canty.

In the decade since, ten more practices have joined his fleet, expanding the firm from a single town in the Hudson Valley to seven offices across five states in the Northeast — with no signs of slowing down.

Today, Donohue, O’Connell & Riley, PLLC boasts experienced attorneys dedicated to providing a high level of legal services for the most complex estate and tax planning issues involving assets around the globe. Whether establishing a domestic trust to avoid taxes on a villa in Europe or executing an estate plan to conserve 500 acres of land to be used as a nature preserve in Nova Scotia, the firm employs creativity and know-how to help clients reach their goals.

“Clients have different objectives depending on their assets and where they are in life,” says Donohue. “It is fulfilling to find ways to accomplish their estate planning goals in an intelligent and tax-efficient fashion.”

Closer to home, the firm advises clients on how to take advantage of trust laws and low taxes in New Hampshire when they reside in highly taxed states. “We set up trusts in New Hampshire, a state that has no state income or estate taxes,” explains Donohue. “Once assets are placed in trust, they grow free of federal and state estate taxes without requiring clients to live in New Hampshire — it can be a win-win.” 

TRUSTED ADVISORS 
Establishing long-term, trusting relationships with clients is key to Donohue, O’Connell & Riley’s success. Clients need to feel comfortable in confiding sensitive financial information as well as private family dynamics to their lawyers to create a smooth and amicable transition of assets to beneficiaries during the administration of a trust or estate.

“We certainly navigate the financial piece to create value, but 80% of the job is understanding the emotional issues that are involved when assets pass from one generation to the next,” says Donohue. Having prepared over 10,000 estate plans, the firm’s attorneys have developed a sixth sense for how to navigate delicate family and business dynamics to avoid conflicts and eliminate unanticipated surprises.

That commitment to client service continues when it comes to legal fees. All estate plans are prepared on a flat fee basis, with clients advised of the tax savings attributable to the firm’s legal services. “We provide clients with the return on their investment up front,” says Donohue. “When planning for the future of your family, we believe fees should never get between a client and their lawyer. We want clients to be able to pick up the phone and call without feeling they will get another bill in the mail.”

Donohue, O’Connell & Riley strives to always have its clients’ best interests in mind and values being a part of their lives. “My relationships with my clients are very important to me,” says Donohue. “It is an honor to set up an estate plan for a client, giving them peace of mind that they have made a positive impact on future generations.”

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After over 165 years, the firm’s Warwick office has recently undergone a major renovation. 11 Oakland Avenue was originally owned by the first mayor of the village of Warwick, William Ogden, and the last major update was in 1895. The current facelift includes an installation of a new roof, insulation and siding.

Our investment underscores our commitment to the firm’s first location and our hopes that it will continue to serve the community well into its third century as a fixture on Oakland Avenue.

The combination will give Stage Law Firm clients the opportunity to benefit from the firm’s local Warwick presence and regional scope for sophisticated estate, tax and elder law planning.