Approaching retirement age: A Social Security, Medicare checklist

What you don’t know about Social Security and Medicare can hurt you.

Both of these critical retirement programs have complex rules governing when you file for benefits, interaction with employment, and spousal and survivor benefits. Any one of these factors can make thousands of dollars of difference in lifetime benefits or costs.

Here’s a rundown of key points to remember when navigating the sign-up process as you approach retirement age.

Social Security

About half of all Americans file for Social Security when they first become eligible for benefits, at age 62. Most would be better off waiting because benefits are increased for every year that you wait, up to age 70.

But there’s no one-size-fits-all solution. Some who have suffered a job loss or face other emergency spending needs may have a compelling need to replace income as soon as possible; others decide to file early if they have reason to think they won’t live long enough to beat the “break-even point” when total benefits received exceed the income foregone while waiting.

Social Security’s filing rules are built around the program’s full retirement age, or FRA (currently 66). The idea is to ensure that Social Security pays out fairly among all beneficiaries, no matter what age you file. Monthly benefits for earlier filers are reduced accordingly to avoid paying them higher lifetime benefits.


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However, a focus on lifetime benefits misses the point. Social Security is intended as a source of guaranteed income to meet living expenses no matter how long you live. Most people will do better making a choice that boosts their monthly payout – especially married couples. Studies show that higher monthly benefits are helpful – even for households that have done a good job saving for retirement – in the out years in cases where one or more beneficiaries far outlive mortality averages.

Under the rules, annual benefits are reduced for most of the years you start early, based on an actuarial projection of average longevity. For a 62-year-old, the net effect will be a 25 percent permanent reduction of annual benefits. On the other hand, your benefit will be bumped up by 8 percent for every year that you delay filing beyond the FRA up until age 70, after which credits for waiting no longer are awarded.

Two online tools that I like for running what-if projections are at Financial Engines (free) and Social Security Solutions. Both are especially good at offering up strategies for couples. For individuals, the Social Security Administration Retirement Estimator also is helpful.

Moreover, if you have income from wages in your 60s, it makes little sense to file early for Social Security. Earlier filers in 2016 will see some of their benefits held back if they have income over a certain level – $15,720 in 2016 in most cases. (Social Security defines “income” in this context as wages from employment or net earnings from self-employment). If earnings exceed the limit, $1 will be deducted from benefit payments for every $2 earned over that amount. The withheld benefits are added back into benefits after the senior reaches the FRA. After reaching your FRA, you can have an unlimited amount of income and receive Social Security benefits without penalty.

Married people sometimes put on the blinders when it comes to Social Security. That’s a mistake because the program rules include valuable benefits for spouses and surviving widows. The survivor rules permit widows to receive up to 100 percent of a deceased spouse’s benefit or her own benefit, whichever is greater; the spousal rules permit receiving the greater of her own benefit or up to half of a living spouse’s benefit.

The upshot of the survivor rule: Couples usually benefit when the spouse with the higher lifetime earning history (which translates into a larger Social Security benefit) delays filing. That’s most often the man–and men can expect their wives to outlive them. A

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