Delaying Social Security bennies could come back to bite clients

For every action there is a reaction. It’s a basic rule of science — and financial planning. I wanted to share an e-mail I received from an InvestmentNews reader in California regarding an elderly woman who purposely delayed taking her Social Security benefits to boost her retirement income.

The reader is a Regional Coordinator for the HICAP of Northern California — the Golden State’s version of the State Health Insurance Program that advises seniors on health care and long-term care insurance decisions.

“An 89-year old HICAP client who lives in a subsidized one-bedroom apartment and receives food stamps now thinks delaying Social Security was not a good idea,” wrote Sabine Nooteboom. “She has spent down all her savings and would qualify for full Medi-Cal (the California version of Medicaid) except that her income is about $200 too high.”

Ms. Nooteboom, who also works as a para-planner for a fee-only adviser, notes that being on Medi-Cal would save the woman thousands of dollars per year on insurance premiums, drug costs, co-pays and co-insurance, and would also pay for several hours per week of in-home supportive services. “She is eligible for Medi-Cal LTC, which would pay the balance of nursing home costs not covered by her income, but she’s not yet ready for that level of care,” Ms. Nooteboom added. “Instead, she is looking at possibly moving to a group home in a nearby county and unfortunately I couldn’t think of any way to help her stay in her home.”

What a sad story! While this unfortunate woman may not fit your typical client profile, it shows how best-laid plans can go awry and the challenges of longevity that many current and future retirees may face.

It also demonstrates why long-term care planning is such an important piece of a comprehensive retirement-income plan. As state and federal budgets continue to be squeezed, so will safety net services such as Medicaid-financed long-term care. Making the right financial decisions now will provide more options later.

Perhaps we all need to review how the standard financial planning guidelines of deferring taxes on retirement savings could impact the cost of health care in retirement. Under current law, all income, including tax-free muni- bond interest, affects how much Social Security income is taxed and whether your clients will be subject to high-income surcharges on the Medicare Part B and Part D premiums.

There’s an excellent discussion on this topic in the Healthcare Costs in Retirement group on LinkedIn. As one member posted: “I’m not saying one shouldn’t use a 401(k). I am saying one should evaluate the whole picture and learn about what options can be tax-free later. Your retirement plan can actually be used against you for Medicare/healthcare planning.”

Another adviser chimed in: “Bite the tax bullet now and put everything into a Roth.”

I’d love to hear your thoughts. This is something we all should be discussing.