12 Planning Tips for Social Security Benefits
Helping clients plan for Social Security benefits may involve a lot of information gathering and research, but doing so could save them a heap of headaches and a lot of money. Here are 12 planning tips that stand out to me as potential opportunities. These can provide great relief and keep your clients out of the danger zone.
- If a person is past their full retirement age (age 66) and is submitting the initial application for Social Security retirement benefits, be sure to claim the allowed six months of retroactive benefits. One important question to consider is if your clients should start full retirement age at age 66 or wait until age 70. Life expectancy data shows that a person who retires at age 66 will live until 86.2, and a person who retires at age 70 will live until he or she is 87. With this in mind, I suggest waiting until age 70 to begin receiving benefits. Keep in mind there is an exception; the break-even point is age 81, so if your family history shows that most members do not live beyond their early 80s, it may not be beneficial to wait.
- If you suspended Social Security benefits at or after full retirement age and are on Medicare Part B, pay the premium out of your own pocket. The government will pay your Medicare Part B premium if you have suspended benefits, but then you will not get the eight percent per year delayed retirement credits. Medicare Part B premium increases are limited to the increase in Social Security benefits if you are collecting benefits, but not if you have suspended benefits. You will be subjecting yourself to potentially higher increases in the Medicare Part B premium by suspending benefits between full retirement age and age 70. This applies to singles with less than $85,000 of income and joint filers with less than $170,000 of income. People with incomes greater than those amounts are currently subject to much higher premiums for Medicare Part B.
- For single individuals who do not need the income, consider a file-and-suspend strategy that allows one to lock in the larger monthly benefits later and hedge their bets with the ability to reinstate at any point with retroactive benefits. An important risk consideration for any delay in receiving Social Security benefit payments is that after death, Social Security benefits aren’t retroactive. A sudden and untimely death during the delay in receiving Social Security retirement benefits leaves a surviving spouse or estate with no value in hand for the years Social Security was not taken. If this risk of loss of value is a concern, one solution might be to verify life insurance coverage for this amount through age 70.
- Be sure you are aware of the benefits related to certain spousal age differences. With the 2014 full retirement age, the file-and-suspend provision is only beneficial with a spousal benefit if the lower earner is older than the high wage earner is or is less than eight years younger than the high wage earner is. The smaller the difference in ages, the bigger the benefit. Assuming the Social Security retirement benefit is not needed, the file-and-suspend option should be used in most situations with a wage earner and a nonworking spouse. It should also often be used when the lower-earning spouse’s lifetime earnings are significantly less than the higher-earning spouse’s.
- When working with two high-earning spouses of equal ages who both want to delay benefits to age 70 in order to earn delayed retirement credits, your best bet is to help them decide which spouse should claim the spousal benefit at full retirement age. Because no couple will be the exact same age and have the exact same primary insurance amount, the answer will be different for each couple.
- Applying for Social Security benefits relating to marital status (retirement, survivor and disability) for same-sex married couples is important, regardless of meeting the current requirements. If you have clients who are ultimately found to be eligible, they can possibly get benefits retroactive to the filing date.
- Members of same-sex marriages should carefully consider the effect their choice of state of domicile (residence) will have on their Social Security benefits. This refers to the residence they lived in at the time of application or while the claim is pending a final determination. After the claim is approved, the state of residence does not matter.
- For the self-employed husband and wife who work together, who are beginning to collect Social Security: this would be the time to shift income to the younger spouse and have the initial enrollee lower their wages to the maximum allowable at age 62 to avoid a payback. That allows the household to enjoy the highest possible benefit for the first four years in which either spouse is eligible.
- Remind your clients and their parents who are widow(er)s to evaluate whether they should begin to collect Social Security at age 60 as a survivors benefit. The Social Security Administration will not notify them of their eligibility for survivors benefits.
- Be aware: There may be some confusion on the repay and reapply option. Prior to Dec. 8, 2010, there was no 12-month or once-in-a-lifetime restriction, and many media articles promoted this option as an interest-free loan. Although it is still a valuable tool, it is important to be aware of the limitations in advance so clients who would benefit from it can do so within the time limits.
- Verify the type of Social Security benefit your client is planning on receiving. For example, the government pension offset only applies to the government employee who receives survivor or widow(er) benefits, not the worker’s benefit.
- If the government worker had a previous earnings record that qualified them for Social Security, their Social Security benefit would not be subject to the government pension offset.
- If the government worker dies and the spouse receives a survivors benefit from the government pension, then the government pension offset does not apply.
Bonus Tips for Clients Who Have Gone or Are Going Through a Divorce:
- Remember that the marriage must have lasted at least 10 years for an ex-spouse to collect benefits. If you are advising a soon-to-be-divorced lower earner whose marriage is in its ninth year, you might advise him or her to wait a bit longer with this timeline in mind.
- In order to maintain as many Social Security options as possible, a 50-something client who has been in a long marriage may want to wait until after age 60 to remarry.
For more tips, commonly asked client questions and advisor solutions and in-depth information on advising your clients in this area, reference The CPA’s Guide to Social Security Planning from the AICPA Personal Financial Planning Section. Download a free excerpt on the AICPA PFP Section’s retirement resources page. The agenda for the 2015 AICPA Advanced PFP Conference in January includes sessions on Social Security planning and other advanced retirement and personal financial planning topics.
Theodore J. Sarenski, CPA/PFS, CFP®, AEP, CEP, President, Blue Ocean Strategic Capital, Inc. Ted’s firm delivers customized service for individuals, retirement plans, non-profit organizations, endowments and foundations. He is the author of The CPA’s Guide to Social Security Planning and will be speaking on the “Nuances of Social Security” at the 2015 AICPA Advanced PFP Conference.