He gave an example of a couple—both 57 years old, with the husband’s life expectancy assumption being 85 and the wife’s 90—who had lifetime benefits of $1,241,466 under their previous strategy where the husband could have filed and suspended his benefit and the wife could have filed a restricted application allowing her to get $1,258 a month in spousal benefits from ages 67 to 70. In this scenario, the couple’s maxed delayed worker benefits at age 70 would be $66,864 a year (his at $3,153 a month, hers at $2,419 a month). With the law change, if they both wait until 70 to file for Social Security their lifetime benefits drop to $1,193,965, a reduction of $47,501. If they both filed early at 62, their lifetime benefits would be only $997,060. If she files at 62 and he files at 70, lifetime benefits would be $1,138,501.
“This illustrates the point … that it’s almost imperative for the older/higher-income-earning spouse to delay [claiming benefits] until 70,” Gurwitz says.
70 Is The Magic Number (Mostly)
Social Security claiming can be a very individual matter, and not everyone benefits by waiting until age 70. For example, someone in poor health or with a family history of short life spans might want to claim benefits sooner rather than later. But even with good genes and a healthy lifestyle on your side, forecasting life expectancy is a crap shoot.
“When you have the higher earner delay until 70, the couple will come out ahead if either of the spouses lives past the breakeven age,” says Shanley from Pinnacle. “If the lower earner spouse also delays until 70, then both of the spouses must live past the breakeven age to come out ahead. For many couples, it makes sense for the higher earner to delay and the lower earner to collect earlier.”
The breakeven age is when you can expect your decision to delay Social Security to pay off. Breakeven age calculations take into account various factors, and conventional wisdom holds that if you expect to live beyond the breakeven point, then it pays to delay Social Security benefits.
“One caveat with breakeven analysis is that most people tend to underestimate their life expectancy,” Shanley says. “Many people don’t think that they will live long enough to make deferring worthwhile. However, they miss the importance of longevity and how Social Security can serve as insurance against that risk. By having the higher earner delay until 70, you will have a larger Social Security check later in retirement that can protect you or your spouse from the financial risks associated with longevity. Social Security is a guaranteed, inflation-adjusted paycheck that will come to you no matter how long you or your spouse lives.”
Medicare, RMDs And More
Social Security planning also needs to account for the interplay between post-retirement income, taxation and Medicare.
The Social Security Administration works closely with Medicare (which is run by the Centers for Medicare & Medicaid Services) to manage enrollments in Medicare Part A (hospital insurance) and Part B (medical insurance), and collects payment for Part B and sometimes Part D (prescription drugs).
People who accept Part B pay a premium that’s deducted from their monthly Social Security check. The “hold harmless” clause protects those who qualify for it against a decrease in Social Security benefits due to rising Medicare Part B premiums caused by medical inflation. The provision doesn’t cover Social Security recipients who earn more than $85,000 per individual or $170,000 per couple (there are other disqualifying factors, too).
When Social Security’s cost-of-living adjustment doesn’t rise or rises very little because of low inflation—predictions for 2017 call for a slight bump of two-tenths of 1%—the roughly 70% of folks covered by “hold harmless” are protected from a Plan B premium increase. But the other 30% not covered by the provision bear the brunt of rising medical inflation through higher Part B premiums, which, depending on the size of the surcharge, could take a sizable bite from one’s monthly Social Security check.
“When doing retirement planning, we look out over many years and do a spreadsheet with their various income sources, required minimum distributions, Social Security and the like, and then look at the potential tax impact,” Shanley says. “Your income level and its tax impact will affect your Medicare premiums. With Medicare’s hold harmless agreement, if you’re not careful about where your adjusted gross income could fall, you could be pushed up into a much higher premium bracket where you’re not protected by the hold harmless.”
Moving Target
Among the uncertainties surrounding Social Security is the following certainty: The system has to change in order to fulfill its promise of being a financial backstop for retirees and other targeted beneficiaries. Things have gotten so bad that many people—particularly younger and middle-aged workers—believe the program will go bankrupt.
Melody Townsend, a certified financial planner at Townsend Financial Planning in Mount Sterling, Ky., says she has some clients in their late 30s and early 40s who ask her not to include Social Security when she does their planning. “They see it as icing on the cake—if it’s there, great; if not, then fine because they want to be financially independent without it.”
But Social Security bankruptcy is a misnomer. As mentioned, the trust fund for Social Security’s retirement and disability benefits is forecast to be depleted by 2034, but payroll taxes would still be able to provide 79% of benefits if that happens. That said, a 21% haircut would hurt.
Several options exist to “fix” Social Security if the political coconuts existed to make them happen, and if the public would face the fact that at some point some segment or segments of the population will have to make accommodations if they want the program to be sustainable. The math is troublesome: There are fewer young workers paying into a system that supports a burgeoning retirement population.
According to the Social Security Administration, the number of older Americans age 65 and over will increase from approximately 48 million today to 79 million by 2035. But by 2035, there will be only 2.1 workers for each beneficiary, down from 2.8 workers today.
Possible solutions to the Social Security funding squeeze include raising the full retirement age or boosting taxes. In a report released in June, the Bipartisan Policy Center (BPC) recommended raising the maximum level of taxable earnings from the current $118,500 to $195,000 by 2020 and indexing further increases thereafter to average wage growth plus 0.5 percentage points. The policy center also called for gradually increasing the payroll tax rate by 1 percentage point (0.5 percentage points for both employees and employers).
The BPC, a Washington, D.C.-based think tank founded by former congressional leaders from both political parties, suggests the need for a balanced blend of new revenues and restraints on benefits. “The commission believes that beneficiaries with the highest incomes should make proportionally larger contributions on both sides,” the BPC said in its report.
How that last sentence will play among the AARP crowd remains to be seen. Many observers expect any major changes to the system to take effect far enough down the road that it won’t impact current retirees. For example, the 1983 law to raise the full retirement age from 65 to 67 won’t fully take effect until 2022. But as the recent rules that curtailed the much-loved file and suspend and restricted application strategies show, some changes might come quicker than expected, which could make Social Security planning harder to do—particularly for non-retiree clients.
“The way you account for that is you have to build in a margin of safety in the retirement planning,” says Larry Luxenberg, managing partner and chief investment officer at Lexington Avenue Capital Management in New York City. “I think the basic structure of Social Security will survive for generations, but you can’t take the details for granted anymore.”