Don't 'Torpedo' Medicare, Social Security in Retirement Plans: William Meyer

Many advisors whose firms don’t permit them to give clients tax advice have found “a creative way” to do so: They use a tax-efficient account withdrawal sequence, or a strategic order, to generate retirement income.

“Advisors need to figure out the right way to tap clients’ accounts so you don’t torpedo Social Security or Medicare,” says William Meyer, founder and CEO of Retiree Inc., which seeks to add value to retirement accounts by using the U.S. tax code. 

A tax-efficient withdrawal strategy coordinates Social Security, Medicare and taxes, Meyer explains.

That entails what he calls “an over-time tax analysis” [covering a multi-year period]. Without that, you’re “leaving money on the table instead of finding more money,” he says.

Meyer’s firm offers software to calculate decumulation planning, including the products Income Solver and Social Security Analyzer. 

Meyer, together with William Reichenstein — head of research at Retiree Inc., and of the partners’ other firm, Social Security Solutions, of which Meyer is CEO — developed the software for financial professionals and consumers. (Reichenstein is a professor emeritus of Baylor University.)

In the interview, Meyer describes good intentions gone wrong, such as how a Roth conversion can increase the client’s Medicare premium, an outcome that “will likely” get the advisor “fire[d],” he says.

Social Security claiming is complicated, no doubt, but an area about which advisors would be wise to learn more, especially how benefits interact with Medicare and taxes.

“People tend to claim Social Security sub-optimally,” Meyer argues, which sometimes costs them “hundreds of thousands of dollars.”

Further into the interview, Meyer, a 30-year industry veteran, previously with H&R Block, Advisor Software and Charles Schwab, reveals how voluntarily suspending Social Security payments after claiming early can capture an additional 8% for each year delayed.

ThinkAdvisor recently interviewed Meyer, who was speaking from Overland Park, Kansas, where Retiree Inc. is based.

An enthusiastic advocate for retirees, testifying at a 2016 hearing before the Senate Special Committee on Aging, he suggested changes the Social Security Administration could make to help improve people’s retirement years.

“The largest opportunity for advisors” will be the area of retirement income, Meyer predicts.

Those “who adopt new processes and focus on the right details,” he says, “will be able to differentiate [themselves] and garner more clients and all their assets.”

Here are excerpts of our conversation:

THINKADVISOR: How can financial advisors help clients with tax planning?

WILLIAM MEYER: Most large institutions in financial services don’t allow their advisors to consider taxes and give tax advice. 

But many advisors have figured out a creative way to do tax planning.

For instance, you can talk about a withdrawal sequence, which is the strategic order in which you should tap clients’ savings — what asset classes and holdings — to generate income that clients need to live on in retirement.

What do FAs typically leave out of the mix?

What advisors have missed is looking at the non-financial decisions: How do you coordinate the Social Security claiming decision? How are you generating retirement income? Are you sensitive not to increase the client’s Medicare premium?

Social Security is very complicated, and how you tap into assets impacts how much you pay for Medicare.

What strategy do you recommend?

Essentially, you want to fill in the low tax years so that later on, you pay less taxes or less Medicare premiums. The coordination of Social Security and Medicare is part of a tax-efficient withdrawal strategy.

What’s the foundation?

You need to have the right ingredients: asset allocation and where to put the stocks and bonds; taking multiple accounts as part of the withdrawal sequence, not one account at a time; and how to rebalance at a household level or one account at a time.

What’s next? 

Once you get the right ingredients at a detailed level, you want to look over time [years] to figure out the right way to tap the client’s accounts so you don’t torpedo Social Security or Medicare.

What should the advisor say to a client in broaching this subject?

“Let’s coordinate these decisions to make sure you don’t pay additional premiums for Medicare. I’m going to ensure that you pay less taxes and keep your Medicare premiums as low as possible.”

A lot of clients know what their tax bracket is, but they’re unaware that [for some workers] Social Security is taxed, and that a tax calculation is used to determine Medicare premiums.

Medicare premiums are based on the tax calculation called MAGI [modified adjusted gross income], which is essentially the adjusted gross income on one’s tax return plus tax-exempt interest.

Should all this be part of the financial planning process?

Yes. Advisors need to calculate provisional income for Social Security and then calculate MAGI for Medicare. How they’re generating income will impact Social Security and Medicare premiums.

The first step is to understand that you need to coordinate these. The second step is getting help in calculating provisional income and MAGI as you generate income for a client over time. 

Do you consider only the current tax year?

You don’t want to look at just one year. Many advisors will make the calculation for this tax year only instead of running a forecast of the financial plan including tax calculations over 20 or 30 years.

With our [firm’s] software, you take multiple accounts at the same time and can reduce MAGI and RMDs [required minimum distributions].

What’s another major issue related to this coordination?

You need to do an over-time analysis with tax details. That’s a gap in our industry. People are just looking at a tax bracket for one or two years. The industry is [neglecting to] include taxes at a detailed level over time.

Please elaborate.

No. 1 is to make sure you look at taxes, including Social Security taxation and MAGI for Medicare.

Without doing that tax analysis, you can’t figure out how to generate income. You’re leaving money on the table and are at risk of making a mistake, instead of finding more longevity and more income.

How else could clients get hurt?

Claiming Social Security in a way so that you’re not applying all the rules to your situation and your [life expectancy].

People tend to claim Social Security sub-optimally, in some cases giving up hundreds of thousands of dollars.

The second biggest issue is that advisors aren’t calculating provisional income [modified adjusted gross income plus half of Social Security benefits plus tax-exempt interest], which can impact clients who have up to $3 million of assets.

For instance?

Let’s say an advisor does a Roth conversion for a client or takes money out of their 401(k). If that conversion increases their Medicare [premium], the client will notice it and will likely fire the advisor because though they just generated income, it hurt the client since the advisor didn’t look at their Medicare.

Or, if an advisor taps a client’s IRA, that potentially could increase their Social Security taxes. You have to make sure to take the right amount out of the IRA so that Social Security taxes don’t increase.

How do you specifically recommend coordinating these aspects so that clients will have more money in retirement?

You want to take a combination of withdrawals from the accounts to stay under different provisional income levels. Social Security is taxed at zero, 50% or 85%. 

If you can keep the withdrawal at 50% rather than 85%, you’re [clearly] keeping more of the client’s money [for them].

What’s in store for people who claim Social Security early, at 62? Many did that when they were laid off during the worst of the coronavirus pandemic.

Advisors can talk to them about a voluntary suspension. That way, you can effectively [adjust] your Social Security strategy after your full retirement age.

How is this possible?

Most people think that spend-and-delay went away. But this is not file-and-suspend as a strategy people used to do.

If you claim at 62 when your full retirement age is 66 [for example], when you turn 66, you tell Social Security that your circumstances have changed and you want to suspend.

For every year you delay, you can get an additional 8%.

So advisors should be aware that they can find tens of thousands of dollars more for clients, which is a way for advisors to differentiate and showcase their expertise.

How do you think the delivery of retirement financial advice will change in the near future?

Just managing investments and rebalancing isn’t going to work for someone in retirement. You need to manage their investments, but you need to combine it with an over-time, tax-efficient forecast.

The two will fit together like peanut butter and chocolate. You need the two together; otherwise, you’ll make mistakes on Medicare.

A Roth conversion has to be sensitive to Social Security and Medicare because that withdrawal from your IRA can increase your Social Security taxes or your Medicare premium.

How important an area will retirement income be for FAs?

It will be the largest opportunity for advisors. Advice definitely has to change — how to help someone in accumulation is different from helping in decumulation.

Those advisors who figure that out and adopt new processes and focus on the right details will be able to differentiate and garner more clients and all their assets.