A recent survey by Spectrum of wealthy Americans, those with a household net worth between $100,000 and $25 million, not including their primary residences, found that only 59% said their adviser understands Social Security benefits, and only 47% said their adviser is knowledgeable about Medicare.
There are strategies to maximize these two key government benefits for clients at all affluence levels, experts say. For Social Security, the first main consideration is to work for at least 35 years, as this benefit takes into consideration your highest 35 years of work history, says Joseph Roseman, managing partner of OWRS Firm in Charlotte, North Carolina. “Each year is indexed to an inflation number,” he says. “If you have less than 35 years of earning history, you get zero credit for those years, which could lower your monthly benefit.”
The second, even more important consideration, is when to start taking Social Security. Benefits are reduced by up to 25% if an individual claims before full retirement age, based on a retirement age of 66, but are increased by up to 35% if a person delays claiming past full retirement age, up to age 70, says Scott Thoma, principal and investment strategist at Edward Jones in St. Louis. “Every year you wait to take Social Security, your benefit goes up 8% a year,” he says.
For example, Edward Jones did an analysis that found that if a person decided to start taking Social Security early, at age 62, their first annual benefit would be $18,000. By age 80, adjusted for a 3% cost-of-living increase every year, that would reach $30,633. For a person whose full retirement age is 66 and starts Social Security that year, their benefits would start at $26,988 and rise to $40,812 by age 80. Someone starting their Social Security benefits at age 70 would receive $40,092 in the initial year and $53,783 by age 80.
Ideally, it is best to wait until you reach full retirement age, says Andrew Westlin, financial planner at Betterment for Business in New York. “The later you delay, the greater the benefit,” Westlin says. “However, the right time is different for everyone. When we do Social Security planning with customers, we look at all of their assets, including pensions and rental incomes, and try to calculate a break-even point.”
In the case that a person decides to retire before their full retirement age, which could be 70, they will need to draw down other assets, which could significantly impact the longevity of their investments, especially in a market downturn, Westlin says. Thus, in some cases, it may be wiser for a person to start taking Social Security earlier.
Edward Jones helps clients consider four factors when deciding when to start taking Social Security, Thoma says. Those are life expectancy, employment, need and spouse. The better one’s health and the longer the individual and spouse expect to live, the more it makes sense to take Social Security later—as long as they are not putting strain on investments, Thoma says. This is in line with the advice from Westlin.
Another factor is employment. If someone plans to continue working, it may make sense to delay taking Social Security, as benefits are reduced by $1 for every $2 earned before full retirement age above $17,040 in 2018, Thoma says. This changes to $1 for every $3 earned at full retirement age for earnings over $45,360.
A third factor is need. If a person determines that their savings and Social Security will not be enough to retire successfully, it may make sense to delay retirement, he says.
The fourth factor is spousal and survivor benefits, Thoma says. With spousal benefits, the spouse can receive up to 50% of the full retirement benefit, he says. A surviving spouse can receive his or her benefit or 100% of the deceased spouse’s benefit, whichever is greater. “This is one of the most important strategies we talk to our clients about,” Thoma says. “The person who will receive the largest benefit should delay taking Social Security as long as they can because it maximizes their own, and their surviving spouse’s benefit. It is a decision for both people.”
When it comes to Medicare, the first consideration is when to start taking it, Roseman says. “You become eligible during a seven month window surrounding your 65th birthday—three months prior, the month of and three months after your 65th—birthday,” he says. “If you fail to sign up for Part B, your monthly payments could increase by 10% annually for every 12-month period of delay. If you are still working at age 65 and have employee-based coverage, you are generally not required to file, but when you stop working, you need to apply immediately.”
If a person chooses Medicare Part A, which covers hospital stays; Part B, which covers physician care, medical services and supplies; and Part D, which covers prescription drugs, they will also need a “medigap” policy, Westlin says. “The last thing you want is to be underinsured,” Roseman says.
“The premiums for Part B and D are tiered based upon your income,” Thoma says. For married couples filing jointly, the threshold is $170,000, and for single filers, it is $85,000, Westlin says.
Thoma adds: “We want to be careful that a client’s income doesn’t push them into those tiers, which is why we recommend health savings accounts and Roth 401(k) and IRAs. Distributions from these accounts are not considered to be income. For clients over the age of 70-1/2 subject to required minimum distributions, they can direct that money to a qualified charitable distribution, which also does not count against their income for tax purposes.”
Roseman says that it is also important to shop around for a new Part D plan every year. “The cost of these plans changes frequently,” he says. “During open enrollment, it is important to compare plans, especially if you have changed medications during the previous year.”