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The oldest baby boomers will turn 66 this year. And, with all due apologies to Sir Paul McCartney, it's a much more significant number than 64 for retirement planning. As you advisors know, when you're 66, you can claim full Social Security benefits; 65 is a close runner-up, since it's the year most seniors will file for Medicare.
Social Security and Medicare may be outside the direct purview of most financial advisors. But advisors should understand the ins and outs of filing for both of these critical retirement benefits, and check up to make clients pursue smart strategies and file correctly. Social Security replaces one-third of income for the average retiree, and it's an especially important source of longevity insurance for seniors who reach very advanced ages – especially women. And Medicare is a critical component in meeting the escalating cost of health care in retirement.
With that in mind, here's a checklist of key points to remember when your clients are no longer 64. (And don't forget: You'll be older too -- if only down the long and winding road. Sorry, couldn’t resist the Beatles pun.)
Filing age. About half of all Americans file for Social Security at age 62–the first year of eligibility for benefits. But for most, it’s a costly mistake that will mean foregoing thousands of dollars in higher benefits. Although seniors can begin receiving checks at 62, annual benefits will be boosted for every year that they wait, up to age 70.
Many seniors worry about the math of lifetime benefits — that is, they fear they won’t live long enough to make delayed filing “pay off.” But those concerns are off the mark.
Social Security is built around actuarial principles – essentially, the mathematics of risk. And a central actuarial idea behind Social Security is the Normal Retirement Age (NRA), a rule used by the Social Security Administration to ensure the system pays out fairly among all beneficiaries. But the main value of Social Security is replacement of current income, not accumulation of assets. That’s where filing later can help.
Monthly benefits for earlier filers are reduced accordingly to avoid paying then higher lifetime benefits. Under the rules, annual benefits are reduced 8 percent for most of the years you start early, based on an actuarial projection of average longevity. For a 62-year-old filing this year, the net effect will be a permanent reduction of annual benefits of 25 percent.
On the other hand, the SSA will bump up payments by eight percent for every year a senior delays filing beyond the NRA up until age 70, after which credits for waiting no longer are awarded.
Working while receiving benefits. The labor force is getting more gray as Americans work longer. If your client files for Social Security at her NRA, she can earn an unlimited amount of income and receive Social Security benefits. However, earlier filers are hit with a penalty on income over $14,640. (Social Security defines “income” in this context as wages from employment, or net earnings from self-employment). If earnings exceed the limit, $1 will be deducted from benefit payments for every $2 earned over that amount.
However, lifetime benefits wouldn’t be reduced because the withheld benefits are added back into benefits after the senior reaches the NRA.
Spousal benefits: Married couples need to pay attention to the interaction of both spouses’ benefits; certain provisions of the Social Security law can create powerful amplifying effects when the higher-earning spouse waits to file for benefits until the NRA or beyond. The bottom line is that it’s generally beneficial for the higher-earning spouse to delay taking Social Security benefits until the NRA or beyond. More details on the spousal rules can be found here and here.
Filing isn't automatic. Although Medicare eligibility begins at age 65, enrollment is only automatic for seniors who already have begun receiving Social Security benefits. In that case, the government mails a Medicare card three months before the date of eligibility. Clients who aren't already receiving Social Security can apply for Medicare through the Social Security Administration, either by visiting a local office or online at the agency's website.
To ensure that your clients’ Medicare Part B coverage start date is not delayed, your clients should apply three months before the month you turn 65, or up to 3 months after.
File on time. It's best for your clients to start thinking about filing for Medicare before retirement, because failing to file within the enrollment window can lead to substantial Part B premium penalties – the monthly Part B premium jumps 10 percent for each full 12-month period that a senior could have had coverage but didn't sign up. A mistake can be costly; a senior who fails to enroll for five years ultimately would face a 50 percent Part B penalty – 10 percent for each year.
“If you’re still working and have healthcare coverage, Medicare’s probably not on your radar. But it’s important to think about it a little bit in advance, especially when you hit 65,” says Adrienne Muralidharan, senior Medicare specialist for Allsup, which offers Medicare plan selection services. “If you don’t enroll in Medicare when you are first eligible, you may face stiff penalties when you do go to enroll – and those penalties will be with you for as long as you rely on Medicare.”
Coordinate with employer-based coverage. For seniors who still are employed at age 65, Medicare is the primary payor under certain circumstances, not in others. At companies with fewer than 20 employees, Medicare is the primary payor; at larger companies, the employer is primary. In the latter situation, a senior can postpone filing for Parts A (hospitalization) or B (outpatient services), although many choose to enroll for Part A anyway since it doesn't require premium payments. Seniors can enroll later without penalty for up to eight months following retirement.
Employed seniors who opt to postpone enrollment should approach this decision with great caution – it should be discussed in person with the Social Security Administration and a workplace plan administrator. And, it's best to notify Medicare at age 65 of a decision not to file in order to ensure that there won't be problems with premium penalties later on. This can be done by checking off a box on the back of a Medicare card that has been sent, by calling the Social Security Administration or through the SSA website.
Traditional Medicare or managed care? Seniors can choose between traditional fee-for-service Medicare or Medicare Advantage, a managed care option that offers all-in-one medical and drug coverage. When a senior joins an Advantage plan, Medicare provides a fixed payment to the plan to cover Part A and Part B; there usually are additional co-payments and deductibles, depending on the plan. Here's a detailed guide to the ins and outs of Advantage plans.
Watch out for premium surcharges. High-income seniors pay surcharges on premiums for Part B and Part D. The surcharges are paid by individuals with $85,000 or more in annual income, and joint filers with income over $170,000, and they scale upwards through four income brackets. The surcharges affect just 5 percent of seniors, since most are retired and don't have that much income. But if you do have clients in these brackets, the payments are substantial.
Consider strategies that might keep the client under the income trigger. One possibility is taking portfolio withdrawals from a Roth IRA, which are not counted in Social Security's definition of taxable income. Or, alternate withdrawals from taxable accounts so that the client doesn't have to pay the surcharge every year.
Mind the gap. Many Medicare beneficiaries opt to purchase an optional Medigap policy, which charges an extra premium but caps out-of-pocket costs. If your clients plan to buy a Medigap policy, it's best to do so during the six-month open-enrollment period, which is open for six months at the time they turn 65 or enroll in Medicare Part B. While no late enrollment penalties are levied, after the open enrollment, seniors may be required to take medical screening tests and can be rejected because of preexisting conditions.
The non-profit Medicare Rights Center offers an excellent, free online toolkit to assist professionals with Social Security and Medicare enrollment issues.
Allsup offers a free guide to Medicare filing.
The federal government publishes an annual – and very comprehensive – guide to Medicare annually. Click here to download the 2012 edition of Medicare & You.
Medicare produces a guide that explains how Medicare works with other kinds of insurance or coverage and who should pay seniors' bills first.
Visit the Medicare website to download a guide to Medigap plans.
About the Author
Mark Miller is a journalist and author who writes about trends in retirement and aging.
Mark edits and publishes RetirementRevised.com, featured as one of the best retirement planning sites on the web in the May 2010 issue of Money Magazine. He is a columnist for Reuters and also contributes to Morningstar and the AARP Magazine. Mark is the author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living (John Wiley & Sons, 2010).