What You Need to Know
- Marcia Mantell discusses real-life issues regarding Social Security claims and retirement decisions.
- This couple met with an advisor to determine their best strategy to claim Social Security.
- Although some of the advice was right, the advisor overlooked a major factor bearing on the couple's retirement plan.
Editor’s note: This is the first “Connecting the Dots” column by Social Security and retirement specialist Marcia Mantell. In each column, she will feature real-life client issues regarding retirement and explain how advisors can solve those problems.
When helping clients think through their Social Security claiming strategies, it’s important to ask key questions, get the technical details right, apply the rules correctly and connect the dots to Medicare, working and taxes. There is a domino effect on client decisions they don’t realize.
A Client Situation
Tony is 68, born in 1953. He plans to claim Social Security at 70. His $2,800 primary insurance amount (PIA) will grow to about $3,800 with delayed retirement credits. His wife, Lucia, is 64, born in 1956. Her PIA is $1,000. She plans to wait until her full retirement age (FRA) to claim her spousal benefit.
Tony decided to retire at the end of June and pursue other activities. Some will provide limited income. Lucia is a freelance writer. She’ll continue to take on jobs for a few years.
Tony was leaving his large, corporate employer, which meant his group health insurance coverage was ending. He decided to sign up for Medicare right away. Lucia will use COBRA continuation insurance to bridge her temporary coverage gap.
Before locking in their final decisions, they wanted confirmation and validation from a financial advisor about their plans. Tony and Lucia had been do-it-yourselfers until now, but since retirement is such a big financial decision, they wanted some expert help.
The advisor they chose reviewed their Social Security plans and found an additional opportunity. Since Tony was born in 1953, he was still eligible to claim Social Security under the grandfathered “restricted application” — a loophole that allowed spouses to claim a spousal benefit today, then claim their maximum benefit at age 70. However, for Tony to claim his spousal benefit, Lucia needed to first claim her own Social Security benefit, even though she wasn’t at her FRA.
The advisor explained that although Lucia would get a reduced benefit now for claiming early, it will increase once Tony claims at 70. Then she will get half of his benefit payment. Therefore, this would be a relatively short-term reduction, and they would get unexpected extra cash from Social Security as they start their retirement years.
This is where things went off the track.
Getting the Technical Rules Right
The advisor was correct that Tony can claim just a spousal benefit if Lucia claims her own benefit. Those born before Jan. 2, 1954, are still grandfathered into the old “restricted application” rules.