As clients grow older, many planning concepts are targeted towards the hazy phases of their lives. But there are also several specific ages that present new prospects and strategies, especially for those in their 60s.
Sixty-two years old is generally the age at which clients who are eligible for Social Security retirement benefits can get their first checks. Reaching this milestone could be a welcome relief if your clients have little other income, or assets that they would prefer to preserve for as long as possible.
But those who can afford to wait should consider doing so. Taking the benefit sooner rather than later means that the check will be substantially lower than it would be if the client was to wait.
A recipient who is scheduled to get $2,000 per month at age 66 might receive as little as $1,500 if she were to initiate those payments at age 62. If she is married, her husband’s spousal benefit could be reduced by an even greater percentage.
True, there is some advantage to getting less money at 62, versus a larger amount at age 66, or beyond. As a rule of thumb, clients usually have to live to about 80 before waiting makes financial sense.
Another drawback to claiming Social Security early hits those who collect benefits before full retirement age (FRA) and are still working and earning income. For 2014, working beneficiaries under FRA can earn up to $15,480 each year before their Social Security benefits would be reduced. After that threshold is crossed, the recipients lose $1 in annual benefits for every $2 earned over the limit.
That penalty might not be quite as onerous as your clients fear. It only applies if the actual recipient has earnings—not passive income (such as interest or a pension). And it doesn’t apply if the recipient’s spouse is the one with the paycheck.
Although the Affordable Care Act has made it easier for some clients to retire before turning 65 and still obtain health insurance, their costs will generally be lower and their coverage more comprehensive once they reach this age and qualify for Medicare.
But the process isn’t as easy as just waking up on their 65th birthday. Clients nearing this age should start by visiting www.medicare.gov during the Initial Enrollment Period, or IEP, even if they’re not applying for Social Security. The IEP begins three months before the month the enrollee turns 65, and ends three months after the birthday month.
Eligible clients should also use this time to sign up for Medicare Part B (medical coverage) and Part D (prescription and pharmaceutical). Clients enrolling in Medicare should also consider adding a Medigap plan, a supplement to original Medicare that can cover a good portion of the patient’s out-of-pocket expenses incurred under Parts A and B coverage. Medigap is coordinated with Medicare, and clients can search and compare plans at tinyurl.com/medigapsearch.
Medicare Advantage plans offer a similar solution to Medicare/Medigap coverage, but the program is provided by private insurance companies. More information on specific plans can be found at tinyurl.com/medicareadv.
Full Retirement Age (FRA)
This milestone is defined by the Social Security Administration and is determined by the client’s birth year. For Social Security beneficiaries born from 1943 through 1954, the FRA is 66 years old. That figure gradually increases for those born in later years, until it reaches 67 for those born after 1959.
There are a couple of key benefits available to clients once they reach this age. First, income earned after FRA will not reduce any Social Security benefits that the recipients are collecting.
More importantly, reaching FRA allows married couples to consider the “file and suspend” Social Security strategy, one that’s most appropriate when there is a substantial gap in lifetime earnings (and benefit amounts) between two spouses.
Say that a husband and wife are both 66 years old. He worked full-time for his adult life, and she was a stay-at-home mom. He’s considering a monthly Social Security check of $2,000, and she can apply for a spousal benefit of half that amount ($1,000). They can take those amounts at this time, and if they need (or want) the money, they should.
But if he “files and suspends” his benefit, she can still receive her spousal benefit ($1,000 per month) right away. Meanwhile, his prospective check will rise 8 percent per year until he initiates his payment or reaches age 70 (whichever comes first). If he waits until age 70, his monthly Social Security check could be more than $2,700, not including any cost-of-living increases.
Another benefit of waiting to take Social Security is that once one member of a married couple dies, the smaller of the Social Security checks goes away. But the larger check will keep coming for as long as the remaining spouse survives.