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By Christine Benz and Mark Miller | 10-11-2012 12:00 PM

Avoid These 3 Social Security PitfallsRetirement expert Mark Miller urges pre-retirees to be mindful of how

age, Medicare, and spousal strategies all interplay with Social Security

benefits.

Christine Benz: Hi, I'm Christine Benz

for Morningstar.com. By not properly

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Video: The Best Time to Claim Social Security?

It Depends

Working Past 65? Don't Overlook the Financial

Side Effects

Fact Finding on Social Security

managing Social Security benefits,

seniors may forgo thousands of dollarsover their l ifetimes. Joining me to share

three common pitfalls in Social Security

is Morningstar contributor Mark Miller.

Mark, thank you so much for being

here.

Mark Miller: My pleasure.

Benz: Mark, you say one of the key pitfalls associated with Social Security is that

people don't spend enough time calibrating what is the optimal time to start

receiving benefits. Let's talk about that one.

Miller: Yes. It's important to say there is no one-size-fits-all answer here. It really

can vary by situation, but i t's important to be aware of the impact of a decision to

file early, to file at the full retirement age, or to file beyond. So, your Social

Security benefit is determined by a formula called the primary insurance amount,

which is a complex Social Security formula for averaging your lifetime earnings,

which is in turn what drives what you get from Social Security in the way of

benefits. So, to give you an idea of the order of magnitude of the impact of these

'

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Close Full Transcript

Benz: Even though filing later can yield some powerful benefits, you say that

those late filers need to be aware of another pitfall. Let's talk about that one.

decisions, the current full retirement age is about 66. If you file at 66, you get

your full 100% of your benefit. If you file at 62, which is the first age you could

file, you would get 75% of your monthly benefit.

Benz: There is a lot of data showing that people do file right at 62.

Miller: Many do. At least half of Americans do file early, and there can be good

reasons for that. There could be an acute financial need; there could be a sensethat their longevity is not going to be great. I'm not saying that's never the right

thing to do, but it's just to be aware that your monthly benefit resets down to 75%

of which you could be getting by waiting until 66. And then on the other side of

that coin by waiting until 70, you would get a 132% of your monthly benefit. There

is no point in waiting beyond 70 because the extra credits stop accruing at 70. So,

that's the range you're looking at, 62 to 70. The rationale for waiting I would like

to say think of it as buying yourself a high-yielding inflation-protected annuity.

Benz: Good luck finding that right now, right in the marketplace.

Miller: Good luck. You even might find it, but it's going to be darn expensive. And

as we know annuities are not yielding much now because of the ultralow

interest-rate environment. Social Security benefit formulas are not predicated on

interest rates really. So, that's a big plus and the fact that you get the annual

inflation increase, which also starts to really compound. Think about that 62 versus

66 or 70, what's that cost of living adjustment going to be computed against? You

really take advantage of the power of Social Security by waiting i f possible.

There's even been good research to suggest that a good strategy can be paying for

that delay if you need to by even drawing down from portfolio assets in the short

term to pay for living expense. That's actually an excellent portfolio-protection tool

down the road because you're getting so much higher Social Security benefits later

on that it reduces that need to withdraw as much from your portfolio.


3 of 9 11/23/2012 7:01 PM



Miller: That's the Medicare pitfall. If you're enrolled in Social Security at age 65,

you are automatically enrolled in Medicare, and you'll receive your Part A and

Medicare card, which is the hospitalization. If you're not enrolled in Social Security

at 65, you have to take the active step of enrolling, and here is the pitfall. If you're

not enrolled at 65 and within a certain window of your 65th birthday, you start

getting penalized for every year of delay, basically for every 12 months of delay

past 65 for Medicare enrollment. It's a 10% penalty on your premiums that you'll

pay in Part B, lifetime for every 12 months.

Benz: So, that never goes away.

Miller: No, it's permanent. And let's say, you made the mistake of waiting five

years. You didn't enroll to Medicare until 70. You'd now be looking at a 50%

lifetime increase. I mean it's just its painful. So, this is not a pitfall that you want

to fall into. You want to make sure you enroll. The only exception is for people who

are still working at 65 under certain situations can be exempt from enrolling for

Medicare if they are still covered by employer insurance. Medicare is still the

primary insurer at age 65, if you're working.

If you work for a small business, with fewer than 20 workers, other than that, you

can have an exemption from filing, but even there it's important to be careful.

Make sure you have paperwork that you've notified Medicare that you're delaying.

Some people even advocate going ahead and signing up for Medicare Part A, which

is hospitalization, anyway because there is no premium attached. And then you're

safe, you know you're in the system at age 65.

Benz: Very little downside to it.

Miller: Very lit tle downside to it, and you avoid what could be a big downside.

Benz: Let's talk about the final pitfall--that has to do with spousal and survivor

benefits. What should people be mindful of there?

Miller: Right. For couples, it's important to think about Social Security as a couples

strategy, and sometimes people fail to do that and kind of have the blinders on it

and think instead about their own benefit. But Social Security has really powerful

spousal features that are important to be aware of, both spousal and survivor. The


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survivor benefit is the most simple to understand, which is that a surviving spouse

can step up to a 100% of the deceased spouse's benefit in cases where that makes

sense. That can be important because now the household has gone from two Social

Security payments to one, but at least you can step up to 100% of the higher one

if that's appropriate to do so.

And then there can be situations with different spousal strategies. So, this involves

where one spouse has a significantly higher earnings history than the other over

the course of a lifetime and is entitled to a higher benefit. So, one that's fairly

well-known is the fi le-and-suspense strategy, where the higher earner goes ahead

and files for benefits at his or her full retirement age, but then immediately

suspends payments. That permits the lower-earning spouse to step in and file for a

spousal benefit.

Benz: And get half of that.

Miller: And get half, assuming that spouse is also at full retirement age. You can

file below that age, but then you'll receive a reduction for that. So, if you filed for

the spousal benefit, you can get half of the spouse's [benefit] to start having Social

Security coming in, while the higher-earning spouse delays the filing to accrue

additional benefits perhaps to 67, 68, or even 70. So, that's the file-and-suspend

method.

The other one is a l ittle less-known, some people jokingly refer to it as "claim now,

claim more later." Here, the higher-earning spouse delays filing for his or her own

benefit and instead files for a spousal benefit for the lower-earning spouse, again

just as a way to get some Social Security income coming in the door.

Benz: Maybe as early as age 62 for that?

Miller: You could do at your full retirement age, let's say 66, and whatever the

spousal benefit that's available, you could take that.

Benz: So, you're taking the spousal benefit for a period of time. Then at some

point…

Miller: File for your own.


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A id Th 3 S i l S i Pi f ll h // i / / id ?id 570313



Benz: File for your own.

Miller: They are all really versions of the same notion of delayed filing but get

some money coming in the door short term.

Benz: So, the idea is to get the biggest bang from that?

Miller: Yes. It's a way of looking at lifetime bang for the buck.

Benz: Mark, obviously there are a lot of different factors to consider here, but

thanks for sharing some of the key pitfalls to avoid in Social Security.

Miller: Thank you, Christine.

Christine: Thanks for watching. I'm Christine Benz for Morningstar.com.

Comments 1-10 of 16 Comments

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A id Th 3 S i l S it Pitf ll htt // i t / / id t ?id 570313



zorkl55

Nov 2 2012, 6:38 AM

This is a very helpful, concise, but thorough outline of the Social

Security and Medicare options available to aging citizens. The

strengths and pitfalls of delaying benefits are put forth clearly in this

interview. Thank you.

RTO31607

Nov 2 2012, 7:03 AM

All should also calculate the cost of not filing @ age 62. Four years of

100% lost income should be compared to the higher rate if waited

until 66. For many folks, it may take to age 80 to make up what was

never received. If the family health history says age 75 is stretching

it, then taking early gets the most money.

bennypaulding

Nov 2 2012, 7:54 AM

Great points. I work with a financial planning firm in Mechanicsburg,

PA, and one of the things we leverage is looking at a client's benefits

based on different life expectancies. There is no one-size-fits-all

strategy for collecting social security benefts, but as rto31607 said, if

a client is going to live past 80, it's almost always to their advantage

to put off collecting their benefits till 70 when you compute the net

present value of the expected cash flows. We definitely advise the

use of the spousal benefit in the interim, where it is advantageous,

but a big pitfall is that if the spousal benefit is claimed before the full

retirement age of the collecting spouse, their benefit will be

PERMANENTLY reduced, and significantly so. Refer to

http://www.socialsecurity.gov/OACT/quickcalc/spouse.html

for more information.

onthecusp

Nov 2 2012, 8:36 AM

Being single @ 60, I'm leaning toward RTO31607's view. The 'bird in

the hand' when I'm definitely still alive is a compelling benefit. My

calculations on cumulative payouts suggest that delaying benefitsonly 'wins' after 15-20 years of payouts and that is assuming only

moderate investment returns. This conclusion is seldom presented

by professional advisors including those on M* and I would like to be

sure I understand why.

Chief K

Nov 2 2012, 8:40 AM

I've got three worries:

#1-Dying and #2-Being Old and relatively Broke.

and #3-Failing to have spent every penny I possibly could until the

day I die.

My approach to handling these worries is:

#1-Exercise, sleep, see my doctor (and pay attention to what I 'mtold to do ).

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A id Th 3 S i l S it Pitf ll htt // i t / / id t ?id 570313



#2-Save, Invest, and Take SSN later rather than earlier.

#3-Ehh, I don't really worry about that issue. If I die with money in

the bank, I doubt I'll lose any sleep about it.

.

DanInAZ

Nov 2 2012, 9:54 AM

This is a good article, particularly with regard to the spousal

benefits. Unfortunately, until DOMA is declared unconstitutional,

which I believe it will be, and the federal government recognizes

same-sex spouses for all federal purposes - the information won't be

useful to me.

The omission in this and other articles, unless I missed it, is a

discussion of the topic where there is a significant age difference

between the spouses and the effect that has on planning.

RTO31607

Nov 2 2012, 10:37 AM

Well, onthecusp, not sure why *M doesn't do the math, but pretty

sure that the gov wants you to ck out before age 66 (if you wait until

then to start) so that it would pay zippo. Next best thing for gov

would be for you to ck out before age 80 so that the total is lessthan otherwise. Worst for gov is for you to live a long long time, but

the new reduced Medicare program may help accomplish that.

wharvat

Nov 2 2012, 10:51 AM

Can someone clarify something Mark mentioned? The exemption

from the Medicare premium penalty also applies if you are on your

spouse's employer insurance as well as on your on employer

insurance, correct?

Also, does signing up for Medicare A at 65 really stop the clock on

the Medicare B premium penalty? Mark seemed to imply that.

wolffie

Nov 2 2012, 1:20 PM

Almost all of these articles recommend waiting as long as possible.

After studying the issue for several years, I can't see the logic in

waiting. Yes, you may receive more in lifetime benefits by delaying,

but the break even point in most cases is 12 or 13 years away. In

my case, the $80K I'll collect between age 62 and 66 is money in the

bank. If I wait until 66, I won't have recouped that $80K until I'm

79.

In the meantime, I'll have the use of that money, while I'm young,

for travel, fun, and investing. It should also allow my current

investments to compound further. If I am lucky enough to live

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8 of 9 11/23/2012 7:01 PM

Avoid These 3 Social Security Pitfalls http://www morningstar com/cover/videocenter aspx?id=570313



beyond 79, yes, I'll be losing out on the additional income waiting

would have allowed for. However, at that point, spending, travel,

and fun starts to decrease for most folks. For me, and it appears, for

half of all other folks, waiting doesn't make sense.

Rathgar

Nov 2 2012, 4:25 PM

The survivor benefits are the main reason to delay. Yes you may

live to 78 but if your spouse lives to 88 they got your higher

"delayed " benefit.

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avoid these 3 social security pitfalls

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