All Things Financial Planning Blog

As our baby boomer population starts contemplating the day they will leave the workplace, they begin to realize that there are a lot of decisions to be made regarding workplace and government provided benefits. Decisions regarding pension payouts may be mind-numbing – (a) single life, (b) joint life -100% benefit, (c) joint life – 50% benefit, (d) lump sum etc., etc. The same might be said for social security benefits – (a) take it at age 62, (b) take it at ‘full retirement age’, or (c) take it at age 70, what is the right decision for you? Further complicating the social security election decision could be the ability to draw on benefits of former spouses to whom you were married for more than 10 years. Needless to say there are a lot of decisions ‘of a lifetime’ that need to be made when you ‘come of age’.

Number-crunching a pension plan payout election or number-crunching a 401(k) ‘payout sustainability’ amount are calculations that need to be tailored to the needs of the individual and their comfort level regarding the assumptions used in analyzing the decision options so we won’t explore those calculations here. 

Other coming of age decisions, like Social Security and Medicare can be more generically discussed.

Medicare eligibility begins at age 65. If you enroll to receive social security benefits at, or before, you turn age 65, you will be automatically enrolled in Medicare. If you are not receiving social security benefits when you turn age 65, you can, 3 months before your 65^th birthdate or up to 3 months after (to ensure no delay in your Part B benefits), apply for Medicare. Failing to timely file can cause your Part B premiums to jump 10% for each full 12-month period that a retiree did not sign up. Don’t worry if you are still working and have health benefits. The government and your employer plan will coordinate the primary payor issue. Alternatively, if you are still working, you can enroll later without penalty for up to eight months following retirement. Always check with Medicare at age 65 to learn about your options and any penalties that could come into play.

Traditional Fee for Service Medicare or Medicare Advantage. You will have a choice between traditional fee for service Medicare or Medicare Advantage. Traditional Medicare has gaps in coverage so many seniors chose to purchase a ‘Medigap’ policy to help cover those expenses in the gaps. Very important to remember is that a Medigap insurer cannot use medical underwriting in the 6 month window of opportunity (Medigap Open Enrollment Period) which begins on the first day of the month in which you’re both 65, or older, and enrolled in Medicare part B! Prescription drug coverage may be available with a Medicare Advantage Plan as might be vision, dental. Medigap policies sold after January 1, 2006 are not allowed to include prescription drug.

Social Security – Age 62, Age 65 or Age 70? About 50% of Americans file for social security at age 62 despite the fact they then will have an approximate permanent 25% reduction of their annual benefit. If, alternatively, we can wait until full retirement age (‘FRA’ – depends on birth year) and beyond, we can increase our FRA benefit by 8% for each year we wait. If we take Social Security before FRA and continue to work making more than $14,640, we will have to repay $1 of social security benefit for every $2 we earn over that threshold. After FRA, there is no earnings problem with having to repay social security benefits paid to you. If you receive a pension or retirement benefit from work in another country, it may have an effect on your Social Security benefits under the Windfall Elimination Provision. If you were married to a person for more than 10 years you may be able to file for benefits based on their earnings history. This can create an invaluable planning opportunity. If we draw Social Security benefits at FRA on the former spouse’s earnings and postpone taking Social Security benefits based on our earnings history, we can take advantage of that 8% per year benefit payout increase effectively increasing our lifetime payout by as much as $100,000 to $200,000!

Needless to say, there are a lot of critical planning decisions to be made when we ‘come of age’. Don’t miss out on deadlines and make your choices wisely. Your decisions will most often be irrevocable so seek counsel from a learned advisor and the Social Security Administration so that costly mistakes do not occur. It’s been your lifetime of work, now that you’ve Come of Age, it’s time to enjoy the all of the fruits of your labor!

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA