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6 Proven Retirement Income Planning Strategies Beginning at Age 62

This article was originally published in, and has been reprinted with permission from, Retirement Daily.

When you contemplate your life, you can usually pinpoint pivotal moments that changed the trajectory of who you are today. Often times, there are one or more magical moments that you will never forget.

In the retirement planning world, age 62 is that moment. Until then, you accumulate assets for some unspecified future date when you will transition from working full time to perhaps part time, and then, in most cases, fully retire. Your primary source of income, i.e., employment, will eventually come to a grinding halt.

Beginning at age 62, several things will begin to quickly unfold that will require you to change your retirement planning mindset from asset to income accumulation. You will need to figure out how to convert the assets that you worked hard to save into a predictable income stream beginning on a specified date, or within a range of dates, that will enable you to match your projected financial needs in retirement. Furthermore, you will need to develop various strategies for creating after-tax retirement income in order to optimize the longevity of your assets for the rest of your life. Needless to say, this is no small task.

This article provides an overview of six proven strategies that can be implemented beginning at age 62 that are at the core of the transition from retirement asset to retirement income planning. Strategies #4 and #5 should be considered before age 62 whenever possible and strategy #6 when applicable. Most important, all potential strategies should be evaluated as part of a holistic retirement income plan.

Strategy #1:  Defer Social Security Start Date

You can start your Social Security retirement benefits as early as age 62 or as late as age 70. Unless you’re no longer working and have no other sources of income or you have a life-threatening illness, it generally isn’t advisable to start receiving Social Security at age 62. This is due to the fact that benefits may be 30 percent less than what they would be at your full retirement age which is between 66 and 67 depending upon the year you were born.

Your Social Security benefits will increase by 8% per year plus cost-of-living adjustments for each year that you defer your start date between full retirement age and age 70. Social Security can be used to insure your, and, if married, your spouse’s longevity risk.

The decision regarding when to begin receiving Social Security retirement benefits should be carefully analyzed, especially if you’re married. In addition to locking in the amount of your benefit, you are also potentially establishing the amount of your spouse’s monthly payment in the event that you die first.

Strategy #2:  Gain Unrestricted Access to Home Equity

As discussed in my 5 Key Financial Metrics When Evaluating a HECM Reverse Mortgage article, housing wealth, although it represents about one half of an average household’s net worth, is often ignored as a retirement income planning tool. There are numerous strategies that can be used to provide readily available tax-free liquidity to pay for planned and unforeseen expenses throughout retirement by monetizing a portion of the equity in one’s home.

Several of the strategies can be used in conjunction with home equity conversion mortgages, or HECMs, the most popular reverse mortgage program. You can qualify for a HECM beginning at age 62. All homeowners age 62 or older with or without a mortgage should evaluate a potential HECM for its ability to provide unrestricted access to an increasing tax-free line of credit without the downsides of a home equity line of credit, or HELOC.

When implemented early and used strategically to unlock illiquid home equity, a HECM reverse mortgage can be used to increase after-tax cash flow at opportune times throughout retirement while providing peace of mind.

Strategy #3:  Reduce Medicare Part B and D Premiums

Medicare Part B and D premiums are determined using modified adjusted gross income (MAGI) from your federal income tax return two years prior to the current year. Assuming you enroll in Medicare when you become eligible at age 65, your MAGI from two years prior, or age 63, will determine your Medicare premiums at 65. 2021 Medicare Part B monthly premiums range from $148.50 to $504.90 per person depending upon tax filing status and 2019 MAGI

Medicare Part B and D premium planning should begin at age 62 when you’re one year away from having your income determine your premiums when you turn 65. You should incorporate the Medicare income brackets into your income tax projections every year for the rest of your life to determine the amount of your projected Medicare Part B and D monthly premiums. Using this information, you can develop strategies to reduce your projected MAGI and associated premiums.

You need to always keep in mind when planning Medicare premium reduction strategies that it’s a year-by-year proposition given the fact that premiums are determined using your MAGI from two years prior to the current year. If your income in a particular year is projected to experience an unusual spike that’s attributable to a one-time or infrequent event that will otherwise optimize your projected after-tax retirement income for several years, it will usually make sense to pay the increased Medicare Part B and D premiums in that year. Examples include a sizable strategic or market-sensitive Roth IRA conversion or an unusual increase in a business owner’s income that will enable a larger qualified business income (QBI) deduction that will result in a large amount of income tax savings.

Strategy #4:  Roth IRA Conversion Window of Opportunity

A multi-year, or staged, Roth IRA conversion strategy is a great example of a retirement income planning technique that should ideally be implemented beginning 20 years before retirement. A ten-year window of opportunity begins at age 62 for doing a Roth IRA conversion, creating a greater sense of urgency for implementing this strategy. This corresponds to the ten years prior to the age 72 commencement of lifetime annual required minimum distributions, or RMDs, from retirement plans.

Roth IRA conversions beginning at age 62 will reduce your annual RMDs for the rest of your life. This can, in turn, potentially reduce your annual taxable income, Medicare Part B and D premiums, taxable Social Security benefits, and net investment income tax. To the extent that this occurs, this will increase after-tax retirement income and contribute to the overall goal of optimizing asset longevity. Reduced RMDs also reduce the survivor’s exposure to the widow(er)’s income tax penalty for couples.

Reduced RMDs can also reduce the value of taxable retirement plan accounts at death and, in turn, reduce taxable income for non-spouse beneficiaries. Given the fact that most non-spouse beneficiaries are subject to a 10-year payout rule for taking distributions from retirement plans and IRA accounts, a reduction in the value of taxable accounts will often result in less tax liability for children and other non-spouse beneficiaries.

Per Strategy #3, taxable income from Roth IRA conversions needs to be balanced against potential higher Medicare Part B and D premiums beginning at age 63. The reduction in RMDs and associated lifetime income tax savings beginning at age 72 can more than offset increased Medicare Part B and D premiums between age 63 and 72 if done strategically.

Strategy #5:  Lock in Sustainable and Potentially Tax-Favored Lifetime Income

The fifth strategy – locking in sustainable and potentially tax-favored lifetime income, has gained in popularity as a result of the virtual demise of corporate pension plans. Besides Social Security, opportunities for receiving a sustainable lifetime income stream with built-in longevity insurance to reduce the risks associated with the stock market have dwindled in the private sector.

Immediate and deferred fixed income annuities are a natural fit for filling this gap in a holistic retirement income plan beginning at any age. Purchase of fixed income annuities takes on more urgency at age 62 due to the fact that the income start date for the majority of fixed income annuities will occur by age 72, leaving less time for deferred growth and increased lifetime income. The income start date is subject to the RMD rules when purchases are made from qualified accounts and traditional IRAs.

Income optimization is the appropriate benchmark that should be used when evaluating fixed income annuities for inclusion in a retirement income plan. The goal is to design a comprehensive strategy that uses the least amount of assets to purchase the greatest amount of sustainable after-tax lifetime income that’s projected to pay for expenses not covered by Social Security, pensions, and distributions from investment and other assets.

Fixed income annuities come in three flavors:  single premium immediate annuities (SPIAs), deferred income annuities (DIAs), and fixed index annuities (FIAs) with income riders. SPIAs and DIAs enjoy a unique income tax advantage when purchased in a nonqualified, or nonretirement account.

Unlike FIAs with income riders that distribute ordinary income that’s fully taxable, SPIAs and DIAs are annuitized. Periodic payments include income and a return of premium, or investment. When held in a nonqualified account, the return of premium portion of each payment, which can be 50% or greater, is nontaxable. Once 100% of one’s investment has been received, future payments are fully taxable.

Strategy #6:  Achieve Sizable Tax Savings and Tax-Favored Lifetime Income When Selling Highly Appreciated Nonretirement Assets

The sixth strategy, although it can be used by anyone at any time, tends to be implemented by individuals in their 60’s. Generally speaking, they’re the ones with highly appreciated nonretirement assets who are looking for a tax-favored lifetime income exit plan. This includes real estate, investment securities, and businesses.

This strategy is designed to reduce or eliminate income tax liability attributable to the capital gain that owners will realize from the sale of the highly appreciated asset by transferring a portion, or all, of the ownership of the asset from one or more individuals to a charitable remainder trust, or CRT, prior to the sale while providing tax-favored lifetime income. A CRT, which is a tax-exempt trust, is a long-standing IRS-blessed strategy when properly structured.

There are six benefits associated with a CRT:

  1. The capital gain on the sale of assets owned by a CRT is exempt from taxation.
  2. CRT funding creates a sizable income tax deduction equal to the projected remainder interest of the CRT that will eventually pass to one or more charities.
  3. The proceeds from the sale of CRT assets can be reinvested to provide a lifetime income stream for the beneficiaries.
  4. Most of a CRT’s annual income will be taxed at favorable long-term capital gains tax rates.
  5. A CRT is an excellent philanthropic tool since the remainder interest of the assets will be distributed to one or more chosen charities following the death of the surviving lifetime income beneficiaries.
  6. CRT assets avoid estate tax.

Six Proven Strategies

The six strategies that are highlighted in this article are proven strategies for creating and optimizing after-tax retirement income that can individually and collectively prolong the longevity of one’s assets in retirement. Each strategy can be implemented beginning at age 62 as part of a holistic retirement income plan.

Deferring Social Security start date (strategy #1) is a time-sensitive strategy. Once you start receiving Social Security, with some limited exceptions, it’s an irrevocable decision that, with the exception of potential cost of living adjustments, will lock in the amount of your periodic and lifetime payments and can also affect your spouse’s payments.

Gaining unrestricted access to home equity (strategy #2) through a HECM reverse mortgage should be implemented at age 62, the qualifying age, whenever possible to optimize the growth of, and after-tax distributions from, the credit line. Planning for reducing Medicare Part B and D premiums (strategy #3), which is an annual strategy, should be implemented beginning at age 62 since income from your federal income tax return beginning at age 63 will be used to determine your Medicare Part B and D premiums when you’re 65.

Roth IRA Conversions (strategy #4) and locking in sustainable and potentially tax-favored income (strategy #5) should be considered before age 62 whenever possible since there’s no restriction on the start date and earlier vs. later implementation can optimize after-tax lifetime income in retirement.

Achieving sizable tax savings and tax-favored lifetime income when selling highly appreciated nonretirement assets (strategy #6) is dependent upon (a) owning highly appreciated assets such as real estate, investment securities, or a business and (b) a desire to sell those assets.

Let the magic begin!

Social Security

Don’t Leave 50% of Your Spouse or Ex-Spouse’s Social Security Benefits on the Table

Deciding when to begin collecting Social Security is complicated. The key variable – how long you will live – is generally unknown.

Suppose you decide to wait until age 70 to start receiving your Social Security benefits. This will result in an increase of 8% plus cost of living adjustments (COLAs) for each year that you defer your start date after your full retirement age (FRA). FRA is based on year of birth and currently ranges from 66 for those born in 1954 to 67 for anyone born in 1960 and later.

If you were born before January 2, 1954, are married, and your spouse has filed, or is willing to file, for his benefits, you can apply to receive 50% of your spouse’s benefit and file for your higher benefit up until age 70. This is referred to as the restricted application strategy.

File and Suspend Strategy Discontinued

Some of you may be wondering how you can receive 50% of your spouse’s benefit while waiting to collect on your own benefit. Wasn’t this strategy discontinued several years ago?

There was a different strategy, called file and suspend, that was repealed by the Bipartisan Budget Act of 2015 (BBA). The file and suspend strategy was used by high wage earners as a way to trigger a benefit for a spouse while waiting to collect a higher benefit.

The high wage earner would file for, and immediately suspend, his benefit once reaching FRA. This enabled his wife to collect a spousal benefit which was as much as 50% of his benefit depending on the wife’s age. The high wage earner’s benefit would increase by 8% per year plus COLAs until his benefits began which could be as late as age 70.

The Restricted Application Strategy Window of Opportunity

As previously stated, you can use the restricted application strategy if you were born before January 2, 1954. This means that you need to be at least 66. It’s possible that you could receive 50% of your spouse’s benefit for up to four years depending upon when you were born by employing this strategy.

What happens if you’re 68 and married, are waiting to start your Social Security benefit at age 70, your spouse is collecting Social Security, and you didn’t know about this option? You should immediately file a restricted application and consider requesting six months of retroactive spousal benefits which is the maximum amount that will be paid.

Don’t Forget Your Ex

Can you use the restricted application strategy if you’re divorced? The answer is yes provided that you meet the following four criteria:

  • You were married for at least ten years.
  • You are currently unmarried.
  • Your former spouse is collecting his/her benefit or is entitled to collect it.
  • The divorce occurred at least two years prior to your claim for ex-spousal benefits.

If you meet the criteria and receive spousal benefits using the restricted application strategy, this will have no affect on your former spouse’s benefits.

Post-January 1, 1954 Birth Social Security Applications

Anyone born after January 1, 1954 is ineligible to file a restricted application for spousal benefits. These individuals fall under the “deemed” filing category.

Anyone in the deemed filing category who files for a retirement benefit or a spousal or ex-spousal benefit is presumed to also file for the other benefit. Only the higher benefit will be paid.

As an example, suppose that you were born in 1958, you’ve been divorced for five years from your spouse to whom you were married for 15 years, and you haven’t remarried. Let’s assume that you plan to file for benefits, your monthly benefit is $2,000, and your ex’s benefit is $3,000.

Since your benefit of $2,000 is greater than 50% of your ex’s benefit of $3,000, or $1,500, you will automatically receive your higher benefit. In this situation, you wouldn’t be able to collect benefits under your former spouse’s record.

Don’t Leave Money on the Table

If you (a) were born before January 2, 1954, (b) haven’t turned 70, (c) haven’t begun collecting your Social Security benefits, and (d) are married and your spouse has filed or is willing to file for his/her benefits, you should immediately file a restricted application to receive 50% of your spouse’s benefit if you haven’t done so already. Remember to also consider requesting up to six months of retroactive spousal benefits.

Don’t leave 50% of your spouse or ex-spouse’s Social Security benefits on the table!

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5 Lifetime Valentine’s Day Gifts for Your Spouse

The mad scramble is on. With Valentine’s Day just around the corner, what should you buy your spouse to show him/her your everlasting love and appreciation? Forget about traditional gifts such as roses and chocolate that are short-lived and just as quickly forgotten.

Here are five unique ideas you won’t find on Amazon that are designed to fulfill you and your spouse throughout your life. A word of caution:  Brush up on your presentation skills since each one will likely be met with dead silence or outrage depending upon the mood of your spouse.

VD Gift Idea #1:  Eliminate Your Mortgage by Retirement

One of the biggest cash flow challenges for many retirees is their mortgage. When you apply for a mortgage while you’re working, the mortgage amount and associated monthly payment is determined using your employment income.

Although your employment income generally increases, so do your expenses. When you retire, your guaranteed sources of income that are available to cover your mortgage payments are often a small percentage of your former employment income.

Given this common scenario, you should design a plan to eliminate your mortgage by retirement whenever possible. This can include an increase in your monthly payment amount, making bi-weekly payments, or using a portion of bonuses to reduce your outstanding balance. Your plan should be part of an overall strategy that includes various savings vehicles.

VD Gift Idea #2:  Defer Your Social Security Start Date

When your spouse dies, you can generally receive 100 percent of his/her Social Security retirement benefit if (a) the amount exceeds your benefit and (b) you have reached your full retirement age, which is between 66 years and two months and 67 depending upon when you were born. This is the good news.

The bad news is that the monthly amount that you receive for your lifetime could be significantly less than what you would otherwise qualify for depending upon when your spouse began collecting his/her benefits. The difference could be as much as 77% if he/she began collecting benefits at age 62 vs. waiting until 70.

Assuming that your Social Security benefit will be greater than your spouse’s, you’re in good health, you have other financial resources, and your goal is to maximize your spouse’s benefit in the event that you predecease him/her, it behooves you to defer your Social Security starting date as long as possible, up to age 70.

VD Gift #3:  Start a Staged Roth IRA Conversion Plan

While there are several benefits of a staged, or multi-year, Roth IRA conversion plan, one of the least publicized is the ability to reduce a widow or widower’s income tax liability. This is due to the fact that surviving spouses who don’t remarry are subject to higher income taxes.

Distributions from Roth IRA accounts, unlike traditional 401(k) plans and IRAs, generally aren’t taxable. A staged Roth IRA conversion plan can be used when both spouses are alive to convert otherwise taxable assets to nontaxable assets. Although income tax will probably need to be paid on the conversion amounts, the amount will be less in many cases than what will be payable by the surviving spouse, especially if income tax rates increase which is likely after 2025.

VD Gift #4:  Include Sustainable Lifetime Income in Your Retirement Plan

When you retire, you want to minimize sleepless nights by knowing that you have, and will continue to have, sufficient income to cover your expenses. Designing a plan that will provide you and your spouse with sustainable after-tax income streams to cover your non-discretionary expenses throughout different stages of retirement is an effective way to accomplish this goal.

There are five reasons for including sustainable lifetime income in your retirement plan that will benefit you and your spouse:

  • Hedge against longevity
  • Match income to projected expenses
  • Protect against the sequence of returns
  • Increase cash flow from potential income tax savings
  • Simplify your financial life

VD Gift #5:  Create an Extended Care Plan

I saved this idea for last since, although it’s potentially the most beneficial one, it’s also likely to be met with the most resistance. Previously suggested as a birthday gift for parents, it’s also suitable for one’s spouse on Valentine’s Day.

Extended care is the least understood and most under-planned for life event. When it’s needed, extended care takes its biggest toll on family and friends in the absence of a plan. Studies have shown that providing extended care for an individual who is chronically ill can have a devastating effect, both emotionally and financially, on caregivers.

An extended care plan may or may not include long term care insurance. When included, long term care insurance provides a predictable, readily available, tax-free source of funds that can be used to pay for a portion, or potentially all, of one’s extended care expenses without disrupting one’s retirement income plan.

The Gifts That Keep on Giving

While the foregoing Valentine’s Day gift suggestions aren’t traditional and won’t provide immediate gratification, each one is designed to fulfill you and your spouse throughout your life. Furthermore, all of them will eventually be appreciated by both of you, even after the other is gone.

If you’re looking for the ultimate gift, include each one as part of a comprehensive retirement income plan. Financial advisor sold separately. Finally, don’t forget the card. Happy Valentine’s Day!

Retirement Income Planning Social Security

Should Your Retirement Age be Dictated by Your Social Security Full Retirement Age?

When you’re planning for retirement, should your retirement age be dictated by your Social Security full retirement age?

Social Security’s full retirement age, or FRA, is currently between 66 and 67, depending upon your year of birth. Once you achieve this milestone, you qualify for full benefits. You can increase your monthly payout by 8 percent for each year that you defer your start date up to age 70. You can also begin collecting Social Security when you turn 62, however, your monthly benefit will be reduced by 30 percent.

When do Americans Retire?

Early retirement is the norm for Americans. According to a LIMRA analysis of census information, 18% of all Americans retire by age 60. 51% retire between 61 to 65. That’s a total of 69%, or more than two-thirds of all retirees, who stop working before reaching their Social Security FRA.

Although there are numerous articles about deferring retirement, retiring after 65 is the exception. Only 12% retire between age 66 to 69, 10% between age 70 to 74, and 9% at 75 and older.

When Should You Retire?

The age at which you should retire is one of the most, if not the most, important decisions that you will ever make. The traditional age of 65 doesn’t need to be your retirement age. There are numerous financial and nonfinancial considerations that come into play. The latter are very important and strongly influence the ultimate decision for most people.

Retirement planning is a very personal process. People need to think about, envision, and plan for retirement beginning in their 30’s. Given the fact that there’s a strong possibility that you will retire by 65, you may need to support yourself, and potentially a spouse, for up to 30 or more years without a traditional paycheck.

The earlier you begin planning for, and setting aside funds toward, retirement, the more flexibility you will have when it comes to the choice of a retirement age. Income tax consequences of projected lifetime contributions and withdrawals are extremely important when determining the allocation of savings between retirement vs. nonretirement investment vehicles.

Protect Your Retirement

When you buy a house, the purchase price and associated financing is the initial cost. There will be ongoing expenses, including annual protection, i.e., homeowners insurance. Just like you protect your home, you need to protect your retirement.

When you save for retirement, a portion of your savings should be dedicated toward protecting you and your family from known risks. These include health, disability, extended care, longevity, and death. The earlier you recognize, understand, and protect against these risks, the smaller the potential lifetime expense. Although it’s never cheap, insurance is generally the most cost-effective risk transfer strategy.

Peace of mind is key to a successful retirement. Forgetting about cost, the emotional and physical consequences to individuals and families as a result of uninsured or underinsured events can be devastating. As an example, the health of family caregivers is typically compromised as are sibling relationships in the absence of a thoughtful extended care plan.

Be Flexible

The most important recommendation that I can make when it comes to planning when to retire is to be flexible. Include a range of potential ages in your retirement plan. The earlier you begin your planning, the wider the range. I generally recommend using increments of five years beginning at age 55 up to 75 as potential targets.

Don’t rule out any age. Despite the best of intentions, many people are forced to retire early because of health issues, inability to find work, or to provide care for family members. On the opposite end of the spectrum, there are those who have the financial ability to retire before age 66 that choose to defer their retirement for various reasons.

Where Does Social Security Fit In?

Social Security, which is an important, if not the only, source of income for many retirees, is one of numerous considerations when deciding when to retire. Given the eight-year range of starting ages, beginning at 62 and extending through 70, there are several possibilities. Married individuals are faced with additional decisions, including the use of different starting ages for each spouse.

Unless financial necessity or health is an issue, you should generally wait until at least your full retirement age to begin collecting Social Security retirement benefits. Age 62, full retirement age, and age 70 should be included as potential starting ages in your retirement planning scenarios.

Generally speaking, your retirement age shouldn’t be dictated by any single financial or nonfinancial variable. This includes your Social Security full retirement age which is but one cog in the ever-turning wheel of retirement planning.

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Bulk Up Your Sustainable Lifetime Income

When you retire, how would you like to receive monthly income that provides the following eight advantages:?

  • Lifetime payment
  • Annual increase of 8% for each year that you wait to receive it up to 32% if you wait four years
  • Potential annual cost of living adjustment (COLA)
  • 15%, and possibly 50% or 100%, federal income tax exemption subject to the amount of your other income
  • 100% state income tax exemption unless you live in one of the 13 states that tax this type of income
  • 50% of your paycheck payable to your spouse for the rest of your life
  • 100% of your paycheck payable to your spouse for the rest of his/her life after you die if the amount is greater than his/her payment
  • Guaranteed by the U.S. government for the last 76 years

If you haven’t figured it out yet, the foregoing are all associated with Social Security retirement benefits. Each is attractive in and of itself. When taken as a whole, it’s an almost perfect solution for retirees.

Uncovered Expenses

What’s missing? Depending upon the amount of your monthly benefit, which is determined by several variables, your annual after-tax benefit will generally be somewhere between $10,000 and $25,000.  While this is a nice base, the reality is that this may only pay for groceries and a small to moderate amount of housing expenses.

What about all of your other expenses? How are you going to cover them? Assuming that you don’t receive a sizable lifetime pension or annuity payment, you’re probably dependent upon savings and other investments to pay for your other nondiscretionary and discretionary expenses.

Unless the item is tax-deductible such as property taxes, you need to withdraw 20% – 65% more than the amount of your expense if you’re paying for it with funds from non-Roth retirement plan accounts depending upon your tax bracket. In addition, all savings and investment accounts are subject to various risks, including longevity, withdrawal rate, inflation, and sequence of returns.

Supplement Your Social Security Income

Given these facts, why wouldn’t you want to exchange a portion of your savings and investments for another secure lifetime paycheck similar to what you receive or will be receiving from Social Security? This paycheck would be paid from a life insurance company in the form of a fixed income annuity. Life insurance companies are heavily regulated and are subject to strict financial reserve requirements. Many are highly rated and have been making annuity payments longer than the U.S. government has been paying Social Security benefits.

In addition to receiving a secure paycheck, a fixed income annuity shelters you from the longevity, withdrawal rate, and sequence of returns risks associated with investment accounts. While it doesn’t technically protect you from inflation risk unless you opt for an annual inflation adjustment, the mortality credits built into fixed income annuities increase the return that you receive compared to other types of fixed income investments.

Duplicate Social Security’s Advantages

With a fixed income annuity, you can match three of Social Security’s advantages and potentially improve upon a fourth. The three benefits you can match are sustainable lifetime payment, potential annual cost of living adjustment, and joint lifetime payment if you are survived by a spouse.

The benefit where you can potentially do better than Social Security is taxation. Whereas many Social Security recipients are only able to exclude 15% of their benefits from federal income tax due to the amount of their other income, individuals who receive payments from two types of nonretirement fixed income annuities can shelter approximately 50% of their benefits from federal and state income tax.

The two types of annuities are single premium immediate annuities (SPIAs) and deferred income annuities (DIAs). The amount of each payment that’s excluded from taxation is the portion that’s considered to be a return of one’s investment. The calculation is determined by your life expectancy at the annuity starting date.

Although Social Security provides a nice after-tax base of sustainable lifetime income, it’s limited in the amount of expenses it can cover. Supplemented by an appropriate amount of income from fixed income annuities, it can reduce a number of risks associated with equity and other types of investments and provide peace of mind.

Social Security

Optimize Retirement Cash Flow, Not Social Security

Social Security is a beautiful thing. What other lifetime fixed income annuity allows you to choose a starting age anywhere between 62 and 70, increases your lifetime income by 6% per year for each year that you defer your start date between 62 and full retirement age, or FRA, (66 to 67 depending upon year of birth), increases your lifetime income by 8% per year for each year that you further delay your start date between FRA and 70, and provides for potential annual cost-of-living adjustments (COLAs)?

Spousal and Survivor Benefits

The good news doesn’t end there. There can be a bonus payment if you’re married. When you collect your benefits, your spouse may be entitled to receive a spousal benefit. The payment is 50% of your FRA amount if your spouse is full retirement age and the amount exceeds the benefit to which your spouse is eligible based on his/her earnings record.

Furthermore, your benefits can potentially continue to be paid to your surviving spouse for his/her life when you die. If certain qualifications are met, this in effect converts your single life fixed income annuity to a joint life fixed income annuity at no additional cost to you.

Assuming that you were married for at least nine months at the time of your death and your surviving spouse is full retirement age, he/she will receive the greater of (a) 100% of your benefit, with a minimum of 82.5% of your FRA amount if you were receiving a reduced payment because of early retirement, or (b) his/her benefit based on his/her earnings record.

Breakeven Analysis – A Starting Point

When should you begin collecting Social Security? A starting point for answering this question is to prepare a breakeven analysis. The purpose of doing this is to compare projected annual and cumulative benefits using various starting ages.

To illustrate this, please see the attached example.  It assumes a couple, Earner and Spouse, ages 62 and 59, respectively. Earner’s age 66 FRA monthly Social Security benefit is $2,000, with $1,500, or 75% of this amount, payable if the benefit begins at 62 and $2,640, or 132% of Earner’s FRA amount, if Earner’s benefit begins at 70. To keep the example simple, benefit amounts are unadjusted for potential COLAs. The yellow in the cumulative column indicates the optimal cumulative benefits each year.

Per the spreadsheet, assuming that Earner begins collecting Social Security at age 62, his four-year head start enables him to accumulate greater benefits for 15 years than if he waited until 66 to apply despite the fact that his annual benefit of $18,000 is $6,000, or 25%, less than his age 66 benefit of $24,000. It’s not until 2031 when Earner is 77 and Spouse is 74 that their cumulative benefits of $288,000 are identical.

The tide turns in favor of starting Social Security at 66 for Earner beginning at age 78 through age 81 after which the starting age 70 cumulative benefits of $31,680 per year begin to exceed the age 66 cumulative benefits of $24,000 per year.

Optimize Retirement Cash Flow

A Social Security breakeven analysis is the starting point for determining when you should begin collecting Social Security. The decision should always be made within the context of a retirement income plan in order to determine which starting age is projected to optimize lifetime after-tax cash flow using various what-if scenarios. There are many variables that need to be considered that aren’t included in a Social Security breakeven analysis.

Although lack of financial resources and questionable health generally support earlier vs. later claiming, many individuals who apply for Social Security before FRA do so without considering the long-term impact of their decision on lifetime cash flow for themselves and their spouses, if married. While it’s tempting to begin receiving Social Security at age 62, assuming your FRA is 66 and excluding potential COLAs, you will permanently forfeit 25% to 43% of the monthly benefit that you, and potentially your spouse, would otherwise receive by deferring your start date to age 66 or 70, respectively.

See 3 Pitfalls of Social Security Optimizers

Social Security

Social Security Benefits Take Another Hit

The Bipartisan Budget Act of 2015 that was fast-tracked (think bullet train) and passed by Congress last week and signed by President Obama yesterday includes provisions that will permanently reduce Social Security benefits for millions of people. The bill comes on the heels of Social Security Administration’s October 15th announcement that there will be no cost of living adjustment, or COLA, for Social Security benefits in 2016.

Citing unintended loopholes in the current law as the reason for the change since becoming a target for repeal with the release of the fiscal 2015 budget by the White House in March of 2014, the legislation effectively eliminates the popular “file and suspend” claiming strategy that enables married individuals to receive Social Security benefits that they wouldn’t otherwise be entitled to receive.

Thanks to an eleventh-hour amendment to the House Budget bill, those currently collecting benefits using the file and suspend strategy may continue to receive them. In addition, anyone over full retirement age or reaching full retirement age in the next six months may implement this strategy. Individuals who don’t fall into either of these two categories and included this technique as part of their retirement income plans aren’t as fortunate. They will be forced to revise their plans, and, in many cases, retire later than originally planned.

6-Month Window of Opportunity

For the next six months, a married couple can choose to have one spouse file for benefits upon reaching full retirement age, which is currently 66, and immediately suspend receipt of those benefits. This enables the spouse, usually the lower-earning individual, to collect a spousal benefit up to 50% of the file and suspender’s full retirement age benefit, with 50% applying if the spouse has also reached full retirement age.

Spouses of file and suspenders who turn 62 before December 31, 2015 can begin collecting a spousal benefit beginning at any time, not just for the next six months. If the spouse of the filer turns 62 in 2016 or later years, however, he/she will be forced to receive the larger of his/her retirement benefit or spousal benefit due to the “deemed filing” rule.

In addition to a spousal benefit, the file and suspend strategy enables the file and suspender to earn “delayed retirement credits,” resulting in an increased benefit of 8% per year plus COLAs until age 70. This results in an additional benefit of up to 32%, plus COLAs assuming full retirement age of 66 and the benefit start date is deferred to age 70.

After the legislation goes into effect, you will still be able to defer your start date beyond your full retirement age to take advantage of delayed retirement credits; however, your spouse won’t be able to receive his or her spousal benefit until you begin to receive your benefit. Assuming a full retirement age 66 monthly benefit of $2,000 for the higher income earner with benefits deferred to age 70 and assuming the spouse has also reached full retirement age, the inability to use the file and suspend strategy would result in a loss of benefits of $48,000 (50% x $2,000 x 48 months) plus COLAs.

Earlier Benefit Claiming

Many married couples who were planning on using the file and suspend strategy will file for their Social Security benefits earlier than they would otherwise do in order to meet their expense needs as a result of the elimination of this valuable retirement income planning tool. The timing of filing for benefits could change in at least two different ways.

One possibility is that the higher earner will continue to defer filing for his benefit beyond full retirement age to as late as age 70. His spouse will file for a benefit upon reaching full retirement age based on her earnings record assuming she is eligible to collect her own employment-based benefit.

A second possibility is that the higher earner will apply for benefits upon reaching full retirement age. Although his benefit will stop growing with the exception of  potential COLAs, this will enable his spouse to collect a spousal benefit assuming that this amount is less than the spouse’s benefit based on her earnings record. The couple may end up receiving larger lifetime benefits in this situation if the higher earning spouse dies before he would have filed for benefits if the file and suspend strategy was still available.

Future Benefit Reductions and Potential COLA Stagnation

Although the changes included in the Bipartisan Budget Act of 2015 pertaining to Social Security are projected to result in estimated savings of $81 million to the federal government over the next ten years, the long-term solvency of the system hasn’t been addressed. There are several other proposals on the table and others in the works that, if enacted, will result in additional widespread benefit reductions.

Also worth noting, assuming that the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, continues to be used for calculating potential COLAs, Social Security recipients’ benefits may continue to remain stagnant in the future. The average COLA has been 1.2% since 2008, including three years with no increases. The Experimental Price Index for the Elderly, or CPI-E, which gives more weighting to housing and health care and is getting more attention recently as a possible replacement for the CPI-W, would result in opportunities for higher potential COLAs.

Follow the Latest Developments

There will be a lot of media and other commentary in the coming days and weeks about intended and unintended consequences as well as planning opportunities pertaining to the changes to Social Security brought about by the Bipartisan Budget Act of 2015, including several changes not addressed in this post. This is the largest reform to Social Security since the Citizens’ Freedom to Work Act of 2000 which was responsible for the file and suspend claiming strategy.

As my clients and others who read my Retirement Income Visions™ posts and MarketWatch RetireMentors’ articles know, my writings cover the spectrum of retirement income planning, including Social Security. If you want to follow the latest Social Security developments and obtain an excellent education in the process, I recommend that you read Laurence Kotlikoff’s PBS NEWSHOUR and Mary Beth Franklin’s InvestmentNews columns. Both are excellent sources of information about this complicated subject.

Medicare Social Security

Deferring Social Security Helps Pay Medicare Part B Premiums

One of the reasons that many people don’t defer the start date of their Social Security benefits beyond their full retirement age is the belief that their increased benefits will get eaten up by Medicare premium increases.

There are two reasons why this isn’t true:

  1. Social Security benefit increases far exceed Medicare premium increases.
  2. Benefit increases are protected from Medicare Part B premium increases.

Social Security Benefit Increases Far Exceed Medicare Premium Increases

Let’s assume that you’re 65, haven’t started receiving Social Security, your full retirement age (FRA) is 66, and your projected monthly benefit beginning at age 66 is $1,500. Since you’re eligible for Medicare at 65, you will pay your Medicare Part B premiums online, by check, or by credit card. Your premiums will automatically be deducted from your Social Security benefits once they begin.

If you defer your Social Security start date beyond your FRA, which is 66 to 67 depending upon when you were born, your monthly benefit will increase by 8% plus cost of living adjustments (COLAs) for each year that you defer your start date between FRA and age 70. This results in a benefit increase of as much as 32% plus COLAs for individuals whose FRA is 66 who wait until age 70 to begin receiving benefits.

The following table illustrates your projected net monthly Social Security benefit check at various start ages assuming no COLAs, your Medicare Part B premium is $104.90 with a 3% annual increase, and you haven’t elected to have income tax withheld from your check:





Part B


Net Benefit Increase





































Per the table, the annual net benefit increase is 8.3% or 8.4%. Once again, this is assuming no Social Security benefit COLAs. In addition, the annual Medicare Part B premium assumed increase of 3% is conservative given the fact that there have been no increases since 2012 and the average annual increase has been 1.4% since 2007. Furthermore, with the recent signing of the Medicare Access and CHIP Reauthorization Act of 2015, there probably won’t be any increases in Medicare Part B premiums for individuals in low to moderate income tax brackets through 2018 (See Medicare Part B Premiums Increasing Up to 30%).

Benefit Increases are Protected from Medicare Part B Premium Increases

It’s pretty obvious that if you haven’t started receiving Social Security retirement benefits yet, your future benefit increases won’t get eaten up by Medicare premium increases assuming that you aren’t in a high income tax bracket. What happens, however, once you begin collecting benefits?

As previously pointed out, with the recent signing of the new Medicare legislation, Medicare Part B premiums probably won’t increase for individuals in low to moderate income tax brackets through 2018. Absent this change, there’s a “hold harmless” provision in the Social Security Act that was first implemented in 1987 that protects most Social Security recipients from reductions in benefit payments caused by Medicare Part B premium increases.

Specifically, if the increase in the Part B premium in a particular year would result in a reduction in the recipient’s payment compared to the year before, the Part B premium is reduced to ensure that the amount of the individual’s payment doesn’t decline. Higher-income beneficiaries, who are subject to higher Medicare Part B premiums, aren’t covered by the hold harmless provision.

In summary, your decision regarding when to start receiving Social Security shouldn’t be affected by potential Medicare Part B premium increases offsetting increased benefits. Furthermore, once you begin receiving benefits, your benefit increases are protected by law from Medicare Part B premium increases unless you’re a higher-income beneficiary.

Social Security

3 Pitfalls of Social Security Optimizers

Social Security is an important source, and in many households, the largest source, of income for retirees. You can start collecting benefits at any time between age 62 and 70. Since Social Security is an income annuity, the longer you wait, the greater your monthly income will be for the rest of your life.

The Social Security start date decision is complicated by the fact that there are different types of retirement benefits for which you may be eligible. These include spousal, divorcee, and survivor options in addition to benefits based on your earnings. Furthermore, you may qualify for more than one type of benefit at a given time.

How do you learn about all the available strategies and choose the one that will provide you, and your spouse, if married, with the greatest amount of income during your lifetime? Recognizing the opportunity, a Social Security optimizer software industry has evolved with programs targeted for consumers and financial advisers.

Before using any Social Security optimizer, you need to be aware of three pitfalls.

1. Longevity

The results of all Social Security optimizers are dependent upon assumed longevity, i.e., how long you’re going to live. This is the most important assumption that will affect your results. Since it’s also the most difficult to forecast, multiple scenarios should be run with different assumed ages of death.

2. Inconsistent Results

Social Security optimizers vary as to the type and detail of requested data, including, but not limited to, summarized vs. detailed historical earnings, projected earnings, government pensions, and economic assumptions. Consequently, results and recommendations can vary from program to program.

3. Optimized Result May Not Optimize Retirement Cash Flow

Let’s assume that you or your financial adviser use a high-quality Social Security optimizer that captures all of the data points and assumptions needed to recommend the best strategy for your situation. Should you implement the recommended solution? Not necessarily.

It’s important to keep in mind that the overriding goal of retirement income planning is to optimize lifetime cash flow. You want to make sure that you have the right types of assets and income when needed to provide you with sufficient after-tax income to cover your projected inflation-adjusted expenses for the duration of your retirement. The key is timing.

None of the standalone Social Security optimizer programs consider the myriad of financial information and assumptions that are required to determine how the recommended results will impact your projected retirement cash flow. For this reason, an optimized Social Security strategy may not be the best plan of action for ensuring that sufficient cash is available when needed.

I’ve had situations where the recommendation from one of the leading Social Security optimizers was projected to result in earlier depletion of my clients’ retirement assets than would have been the case using another strategy. As an example, deferring the Social Security start date to age 70 to maximize monthly income may not be the best recommendation for a single individual who retires at age 65 with limited investments or other sources of sustainable income.


The Social Security start date determination is one of the most, if not the most, important retirement income planning decisions most people will make. You shouldn’t rely solely on the recommendation of a Social Security optimizer when choosing your start date given the fact that the decision is generally irrevocable and will have long-term consequences for you and your family. Multiple strategies, not simply the “optimal” one, need to be analyzed using comprehensive retirement income planning software to determine the one that’s projected to optimize your retirement cash flow.

Annuities Fixed Index Annuities Social Security

Delayed Gratification is the Key to Maximizing Income with Fixed Index Annuities

When you’re planning for retirement, income is the name of the game. The more sustainable income that you can generate, the less you need to worry about things like sequence of returns and major stock market downturns – before and during retirement.

The idea is to build a base, or floor, of predictable income that will cover your day-to-day expenses. For most people doing retirement income planning, Social Security is the core element of an income floor. Although pre-retirees today can plan to receive a full Social Security benefit beginning somewhere between age 66 and 67 depending upon their year of birth, the benefit that they, and potentially their spouse, will receive will increase by 8% per year for each year that they defer their start date up until age 70. This equates to as much as a 24% – 32% greater benefit depending upon your year of birth and how long you defer your start date.

Assuming that your goal is to build a solid base of sustainable income with the ability to increase your lifetime income amount similar to Social Security, one of the best ways to do this is to invest in a flexible fixed index annuity (“FIA”) with an income rider. The reason that you want to use a flexible, vs. a single, premium FIA is to provide you with the ability to add to your investment should you choose to do so. In addition, you need to purchase an income rider, which is optional with most FIA’s, in order to receive guaranteed (subject to the claims-paying ability of individual insurance companies) income.

Like Social Security, the longer you wait to begin receiving your income, the greater it will be. Unlike Social Security benefits which are increased by cost of living adjustments (“COLA’s”), the lifetime income from the majority of FIA’s available today will remain unchanged once it’s started.

To demonstrate the benefit of deferring the start date of FIA income withdrawals, let’s use one of the contracts purchased by my wife and me two years ago when we were 55 and 48, respectively. I will use my wife’s age as a point of reference for the remainder of this post since income withdrawal amounts are always calculated using the younger spouse’s age.

Per our annuity contract, my wife and I are eligible to begin income withdrawals at least 12 months after our contract was issued provided that both of us are at least age 50. It generally doesn’t make sense to take withdrawals from a FIA income rider before age 60 since the formula used to calculate the withdrawal amount is less favorable and the withdrawals will be subject to a 10% IRS premature distribution penalty and potentially a state penalty. Assuming that we plan on retiring after my wife is 60, there would be no need to begin income withdrawals before this age.

I have prepared a spreadsheet with various starting ages in increments of five years beginning at 55 through 75. The spreadsheet shows the projected percentage increase in our annual income withdrawal amount that we will realize by deferring our income start age compared to ages that are 5, 10, 15, 20, and 25 years younger, depending upon the starting age chosen.

Using an example that’s comparable to the Social Security starting age decision, suppose that we decide to defer our income start age from 65 to 70. This would result in a 31.2% annual increase in lifetime income. We will receive 120.3% more income if we begin our income withdrawals at age 70 instead of at 60. The percentage increases are significant in many cases depending upon the chosen withdrawal starting age compared to another potential starting age.

Similar to the Social Security starting age decision, there are numerous factors that need to be considered when determining the optimal age to begin income withdrawals from a FIA with an income rider, a discussion of which is beyond the scope of this post. Like Social Security, when possible and it makes sense, delayed gratification is the key to maximizing lifetime income.

Social Security

Insure Your Longevity Risk with Social Security

When planning for retirement, you need to plan for all of your retirement years. Sounds obvious, however, too often there’s a focus on living it up in the early years without fully considering the potential for longevity and financial risks associated with the later years. As stated in previous posts, the consequences of the financial decisions that you make before you retire can have a profound effect on your ability to meet your financial needs throughout your later retirement years.

How do you plan for all of your retirement years if you don’t know how long you’re going to live? The answer is longevity insurance, otherwise known as a lifetime income annuity. This type of investment will pay you a specified amount of income beginning at a specified date at specified intervals, e.g., monthly or quarterly, with potential annual payment increases for the duration of your life.

If you’re married, the payments can continue to be paid to your spouse upon your death at the same or a reduced amount, depending upon the contractual terms of the particular annuity. Unlike equity-based investments, the payments will be made regardless of market performance.

One of the best longevity insurance planning tools that most of us have at our disposal is Social Security. With its lifetime income payments, not to mention flexible starting date, i.e., age 62 through 70, and associated 7% – 8% increase in benefits each year that the starting date is deferred, excluding cost-of-living adjustments (“COLA’s”), we can use it to insure our, and, if married, our spouse’s, longevity risk.

The amount of retirement income that we choose to insure with Social Security is a personal decision. It’s dependent upon several factors, including, but not limited to, projected investment assets and liabilities, other projected sources of income and expenses and projected timing and duration of same, as well as income tax laws and projected income tax rates.

Delayed claiming of Social Security benefits, in addition to providing increased annual lifetime benefits, results in greater longevity insurance since there will be more guaranteed income available in the latter years of retirement when it may be needed the most. The ability to delay one’s Social Security benefit start date needs to be determined within the context of an overall retirement income planning analysis that includes an analysis of various potential retirement dates.

Social Security

How to Reduce Your Spouse and Your Social Security Benefits

As discussed in the two-part series, Approaching 62? – Stop Before You Leap, there are financial and non-financial consequences that will be dictated by your choice of a Social Security retirement benefit starting age. It’s a decision that shouldn’t be taken lightly since it may possibly be the most significant factor in your ability to sustain financial security throughout retirement.

If you’re married, sustainability of financial security continues after the passing of the first spouse to die and often lasts for many years. If you decide to begin receiving your Social Security benefits before your full retirement age (“FRA”), you will also be turning on your spousal benefit. This is due to the deemed filing provision.

Under the deemed filing provision, when you apply for Social Security benefits before your FRA, you are deemed to also apply for your spousal benefit and vice versa. This is automatic. As a result, not only will you receive a reduced benefit compared to what you would receive if you wait until your FRA, your spousal benefit will also be reduced. In addition, your spouse must be 62 in order to receive a spousal benefit. Furthermore, a spousal benefit is only payable if you have been married for at least one year before filing for your benefit.

The spousal benefit is 50% of your benefit if your spouse has reached FRA. If you file an application to receive your benefits before your FRA, both you and your spouse will receive reduced benefits. Your benefit will be reduced by virtue of the fact that you’re applying for benefits before your FRA. At best, your spouse will receive 50% of your reduced benefit. If your spouse hasn’t reached FRA, his/her spousal benefit will be further reduced.

Spousal benefits are reduced from age 62 to FRA, which can vary from age 65 to 67 depending upon when your spouse was born. If your spouse is 62 when you claim your benefit and you claim your benefit before your FRA, he/she will receive 70% of 50% of your benefit, or 35% of your reduced benefit.

As an example, let’s suppose that you were born in 1952 and your FRA is 66. Let’s further assume that your monthly benefit at FRA is $1,000, however, when both you are your wife are 62, you decide to apply for your retirement benefits. Your benefit will be reduced by 25% to $750 and your spousal benefit, which would be $500 at your FRA, will be reduced to $262.50 (70% of 50% of your reduced benefit of $750). As a result of starting your benefits at age 62, you and your spouse will receive monthly benefits totaling $1,012.50 (your benefit of $750 plus a spousal benefit of $262.50), or $487.50, or 32.5%, less than the amount of $1,500 (your benefit of $1,000 plus a spousal benefit of $500) that you would have received had you waited until FRA to start your benefit.

If you haven’t reached your FRA and you’re married, beware of the deemed filing provision. That is, unless you don’t mind receiving reduced Social Security benefits for you and your spouse.

Social Security

Working? Social Security Benefits Don’t Stop, They’re Suspended

Last week’s post discussed the fact that, with two exceptions, the choice of your Social Security start date is an irrevocable decision. The two exceptions allow you to suspend payment of your monthly retirement benefit in order to take advantage of Social Security’s annual 7% – 8% benefit increase between age 62 and 70 that’s available to individuals who haven’t yet begun receiving benefits.

Both of the benefit payment suspension exceptions require you to file an application with Social Security Administration in order to implement them, and, as such are voluntary. There’s another way to suspend payment of your benefits that’s automatic and doesn’t require you to complete a form.

Social Security has an earnings test that only applies to individuals who are younger than their full retirement age (“FRA”). FRA varies between age 65 and 67 and is determined by your year of birth. Once you reach your FRA, your benefit amount will be unaffected by the amount of your earnings.

There are actually two earnings tests:

  1. Under full retirement age
  2. The year an individual reaches full retirement age

Under Full Retirement Age

If (a) you’re less than your FRA and (b) you’re not in the year that you will reach your FRA, you can earn up to $15,120 a year without any reduction in your Social Security benefits. Once you exceed this amount, your benefits will be reduced by one dollar for every two dollars in earnings above this limit.

The Year an Individual Reaches Full Retirement Age

In the year than you reach your FRA, you can earn up to 1/12 of $40,080, or $3,340 a month, during each month preceding the month that you reach your FRA without any reduction in benefits. Once you exceed this amount, your benefits will be reduced by one dollar for every three dollars in earnings above this limit.

Benefit Suspension

It’s common for individuals who may be affected by Social Security’s earnings test to use it to target the amount of earnings they will receive in order to avoid a reduction in benefits in a particular year. What many people fail to understand is that to the extent their benefits are reduced as a result of the earnings test, they aren’t lost, they’re simply suspended. Furthermore, there will be an increase in benefits to the extent that they were reduced once FRA is reached and the earnings test is no longer an issue.

My recommendation is don’t let the earnings test drive your decision regarding the amount of your earnings in a particular year for two reasons. First of all, you won’t lose Social Security benefits if your earnings exceed the threshold amount. Your benefits will simply be deferred. Second, the employment income that you’re foregoing may require you to tap into other sources of retirement income prematurely, resulting in a potential accelerated depletion of valuable retirement assets that wouldn’t have otherwise been necessary.

Social Security

The Almost Irrevocable Retirement Income Planning Decision

I don’t know about you, however, I appreciate and enjoy flexibility in my life. When I hear the word “irrevocable,” other than in the phrase “irrevocable life insurance trust,” which I know from many years of experience is a wonderful estate planning tool in the right situation, I get a little squeamish. As Duke Frederick says to Celia in Scene 3 of Act 1 of Shakespeare’s As You Like It, “Firm and irrevocable is my doom.”

As pointed out in the December 17, 2012 post, Approaching 62? – Stop Before You Leap – Part 2 of 2, with two exceptions, the choice of your Social Security start date is an irrevocable decision. This wasn’t always the case. Although it wasn’t well-publicized and wasn’t used very often, the “do-over,” or “pay-to-play” strategy as I liked to refer to it, enabled individuals who claimed Social Security at age 62 to repay 100% of their benefits received to date without interest and receive a higher benefit going forward based on their current age. Ironically, Social Security Administration ended the ability to use this strategy on December 10, 2010, four days after the third of a three-part series on this topic was published by Retirement Income Visions™ (see Pay-to-Play Social Security – Part 3 of 3).

Once you start receiving your Social Security retirement benefits, why would you want to stop receiving them? As pointed out in last week’s post, benefit amounts will increase by 7% – 8% each year that the start date is deferred between age 62 and 70, excluding cost-of-living adjustments (“COLA’s”). You may have started your benefits at age 62 or some other age before your full retirement age (“FRA”) since you thought this made sense at the time and later realized this wasn’t the right choice in your situation. Another possibility is that you learned about a strategy to suspend and restart your benefits at a later date in order to receive a larger monthly payment.

Stopping Social Security Before Your Full Retirement Age

Unlike the now defunct “do-over” strategy where you could repay 100% of your benefits received to date without interest at any time after you began receiving them, there’s a limited exception that enables you to employ a scaled-down version of this strategy. If you claimed benefits before your FRA and you’re within 12 months of when your benefits started, you can withdraw your application and stop your benefits by repaying 100% of what you received so far.

Stopping Social Security After Your Full Retirement Age

Between FRA and age 70, Social Security Administration allows you to suspend retirement benefit payments. This can be done either when you’re approaching your FRA and haven’t started receiving benefits yet or after you have reached FRA and are already receiving benefits. There are different reasons why you would want to do this that’s beyond the scope of this post.

While there are two exceptions when it comes to the irrevocability of the Social Security start date that may or may not be beneficial in a particular situation, these are limited exceptions. As emphasized in the last post, the age at which you begin receiving Social Security retirement benefits may possibly be the most significant factor in your ability to sustain financial security throughout retirement. As Billy Joel says in his song, Get it Right the First Time, “Get it right the first time, that’s the main thing. I can’t afford to let it pass. Get it right the next time, that’s not the same thing.”

Social Security

Approaching 62? – Stop Before You Leap – Part 2 of 2

Last week’s post began a discussion regarding the far-reaching and long-term consequences of the Social Security claiming decision. It concluded by stating that the choice of a Social Security starting age will differ depending upon each person’s unique circumstances.

Why is the choice of a Social Security start date so important? There are several reasons, all of which can be divided into two categories:  (a) Those dictated by Social Security rules and regulations and (b) Other fianncial reasons.

Reasons Dictated by Social Security Rules and Regulations

Social Security rules and regulations affecting the choice of a start date include the following:

  • Benefit amounts will increase by 7% – 8% each year that the start date is deferred between age 62 and 70, excluding cost-of-living adjustments (“COLA’s”).
  • Social Security COLA amounts will be greater for those who defer their start date.
  • If married, it will affect the amount of one’s spousal Social Security benefit.
  • If married, it will affect the amount of one’s survivor’s Social Security benefit.
  • With two exceptions, it’s an irrevocable decision.

Other Financial Reasons

Other financial reasons why the choice of a Social Security start date is so important include the following:

  • It can affect the choice of one’s retirement age as well as that of one’s spouse if married.
  • It may impact sustainability of retirement income and assets for 30 to 40 years.
  • It will influence the amount and timing of withdrawals from retirement and nonretirement investment assets.
  • It can affect the amount of Social Security benefits that are taxable each year.
  • It will directly affect one’s overall income tax liability and tax planning.

As you can see, there are many things riding on the choice of one’s Social Security starting age, most of which won’t become apparent until several years, or even decades, after the claiming age decision has been made. The age at which you begin receiving Social Security retirement benefits may possibly be the most significant factor in your ability to sustain financial security throughout retirement. Given the importance of this decision, sit down with your retirement income planner before going to the “Boldly Go Online to Retire – It’s So Easy!” section of the Social Security Administration website and clicking the “Apply for Retirement” link.