Young couples who marry, and even older couples tying the knot for the second time, may be prepared to utter the traditional wedding vow of 'til death do us part. But how many of them realize that their entwined lives will dictate key retirement decisions, including when they should sign up for Social Security and Medicare?
I was reminded of this fact during the Thanksgiving holiday while visiting with family and friends. I guess it's a sign of my age, but it seems most of my peers and relatives have lots of questions about Social Security and Medicare, and it beats discussing politics over the turkey and stuffing.
Many of the questions were triggered by one spouse's decision to retire and the fact that employer-sponsored health insurance would end along with the job. That introduced the subject of when and how to enroll in Medicare. And the prospect of reduced income in retirement naturally led to questions about how to maximize Social Security benefits to make up some of the loss.
Here is a case study of one of those couples, my friends Karen and Joe. Karen turns 65 in February. Joe plans to retire that same month when he turns 66. Joe is the primary earner. Karen will continue to work part-time.
Karen became eligible to enroll in Medicare in November, three months before her 65th birthday, for coverage that would start in February. Her initial enrollment period began three months before her birthday, includes her birthday month and extends three months after her birthday month.
Normally, if you miss signing up for Medicare during your seven-month initial enrollment period, you must wait until the next general enrollment period, which runs from Jan. 1 through March 31 every year for coverage beginning the following July 1. In the meantime, you could be on the hook for your medical bills, and you will incur a lifelong delayed-enrollment penalty of 10% for every year you were eligible to enroll but did not.
But there is an exception to initial enrollment periods and penalties. If you are covered by an employer-provided group health insurance plan, either through your current employer or your spouse's current employer, you can delay enrolling in Medicare penalty-free until that group health insurance ends. Retiree health insurance benefits and post-employment health-care coverage through COBRA do not count as creditable coverage for Medicare enrollment purposes.
Although Joe became eligible for Medicare last February, when he turned 65, he didn't need to enroll because he had creditable health insurance at work that covered both of them. Once his group health insurance ends next February, he has up to eight months to sign up for Medicare penalty-free during his special enrollment period. Joe enrolled in Medicare this month for coverage to begin in March, the first month of his retirement.
Making the most of Social Security
Retirement usually means more leisure time and less money, so Karen and Joe are anxious to make the most of their Social Security benefits to supplement Joe's pensions and their joint savings.
"Our financial adviser recommends that we both wait until 70 to claim Social Security," Karen said glumly during a follow-up phone conversation.
I disagree. I don't think it's necessary for both spouses to delay Social Security benefits until 70, particularly when there is a large disparity in their benefit amounts, as there is in Karen and Joe's case.
I think it makes more sense to have Joe, the spouse with the larger Social Security benefit, delay claiming until 70. In the meantime, Karen should claim her Social Security benefit when she turns 65 in February. She would receive 93.3% of her full-retirement-age benefit and be subject to earnings restrictions if she earns more than $17,640 in 2019. But it is unlikely that she would earn more than that in her part-time job.
Karen was delighted at the prospect of "having her own money" of about $1,200 per month, even while continuing to work part-time.
In the meantime, the couple can exercise a valuable claiming strategy to boost their joint lifetime benefits. Because Joe was born in 1953, he is among the last group of Americans who can file a restricted claim for spousal benefits when he turns 66 and collect half of Karen's full-retirement-age benefit amount (even though she will begin collecting reduced benefits early) while his own retirement benefit continues to grow until age 70. At that point, he would file for his own maximum Social Security benefit of about $3,700 per month.
Even though Karen's retirement benefits will be permanently reduced because she is claiming early, it will have no effect on her survivor benefit. If Joe dies first, she will receive 100% of what he collects at the time of his death, including any delayed retirement credits. Her smaller retirement benefit would disappear.
Next year, 2019, marks the final year that people reaching full retirement age can utilize the spousal claiming strategy. People born after Jan. 1, 1954, who turn 66 in 2020 or later, will never have that option. Whenever they claim Social Security, they will be paid the highest benefit to which they are entitled at that age, whether based on their own work record or as a spouse. They don't get to choose.