This is the third in a series of discussions regarding claiming benefits under Social Security and Medicare. Today we look at single taxpayers and the choices they must make as to when to start receiving benefits. We already established that most Americans will opt for Medicare coverage as soon as they are eligible at age 65, which remains a fixed age for all taxpayers. We should mention that Medicare registration can (and should) take place about 3 months prior to the 65th birthday for a smooth start.
For anyone receiving Social Security benefits prior to age 65, no action is needed, as Medicare enrollment takes place automatically. Premiums are deducted from monthly Social Security benefits. Only if the recipient declines Medicare Part B is action needed to override automatic enrollment.
Most people know by now that Full Retirement Age (FRA) for Social Security is a moving target. People born after 1937 no longer reach FRA at age 65. FRA is indexed up according to the recipient’s year of birth. For people born in 1960 and later, FRA is a full 67. The entire table is available on the Social Security website (socialsecurity.gov).
Claiming Social Security benefits prior to FRA results in a reduction of monthly benefits for life, whereas claiming after FRA results in increased benefits forever. This makes the claiming decision more complicated, as the consequences are permanent.
Marital status is an important consideration when analyzing options for claiming benefits. Except under unusual circumstances, singles are not responsible for maintaining a spouse’s economic situation once the single recipient has passed. The claiming decision involves structuring income for life without running out of money (falling short of financial independence).
Step one is estimating individual life expectancy, using parameters such as current health, family longevity, and national statistics. The longer the recipient is likely to live, the larger the monthly benefit that will be needed to ward off inflationary pressures. (We know that Social Security payments are indexed for inflation, but the government’s inflationary measure woefully understates the true impact of inflation.)
Another consideration is the ongoing earnings expectation of the potential recipient. How long will the potential claimant keep working, and how much income will be earned during that time? Waiting past FRA results in an 8% annual benefit increase for each year the claimant waits. Note that this increase is credited monthly (2/3 of 1% per month), so the decision can be made at any time up to age 70. After reaching 70, no further age-based increases are available, so everyone should file by that point.
There are several Social Security calculators on the Internet, but it is often helpful to work with a qualified financial advisor to determine your optimal claiming strategy.
Next week we will discuss a much more complex situation -- filing for Social Security as a married couple.
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