Recently, a CPA that we work with had one of their clients ask a question about Social Security benefits.
The client asked “My plan is to start taking my social security when I’m 70. Since they base the amount on my highest 35 years of income, would it make a big difference to make my salary higher and get more in social security when I turn 70? Do you think, if I did make the salary higher, paying the extra taxes would be worth it?”
The CPA reached out to me and initially we agreed that, in theory, the concept holds water, but we weren’t sure if it was worth it and required deeper analysis.
Immediately, I suspected that it wouldn’t be worth it but needed to work out some math before replying. I ran an analysis with one of the more advanced planning tools we have and was able to confirm my initial suspicion; that increasing salary for the sake of increasing the historical wage average for Social Security benefits wasn’t worth it for this client.
First things first, this client is a small business owner and has flexibility with his compensation that not everyone has. Using the assumption that this client could increase his salary up to $100k per year vs. the current $60k per year has a cost, namely the additional tax for $40k more of w-2 wages vs pass-through income as the business owner.
So, the question becomes, does the additional tax paid on this $40k return a large enough increase in Social Security benefits to make paying that tax worth it?
Here are some of my findings:
Using the average of historical wages of $35,000 per year, a $60k salary for 2019, and an age 70 beginning for Social Security benefits, we would predict that the client would receive a $3,183 monthly benefit.
Using an age 90 life expectancy, this converts to $847,854 in cumulative benefits.
If the client were to make $80k in salary for 2019, leaving all else unchanged, we would expect his monthly benefit to increase a whopping $10 per month. Cumulatively, $850,631.
If the client were to make a $100k salary for 2019 and the next three years, we would predict his monthly benefit to be $3,262 per month and equate to $876,309, cumulatively.
After considering the tax cost of the additional w-2 wages and the information from my analysis, the CPA and I can say with confidence that increasing the client’s salary for a larger Social Security benefit is not worth it.
If you have questions of your own about Social Security benefits or any other topic, we are happy to do the research try and help you make a well-informed decision!
Charlie Achterkirch, CFP®
This article represents opinions of the authors and not those of their firm and are subject to change from time to time, and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment or legal strategy. The information contained here has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.