Who doesn't like a good mystery while lounging by the pool or on the beach on a hot summer day? While I can't compete with James Patterson's or Sandra Brown's pulp fiction page turners, I was able to help one financial adviser get to the bottom of a nagging question about why her client's
Social Security benefit was so much smaller than expected.
Sharon Egan, a financial adviser with North Star Investment Management Corp. in Chicago, contacted me recently about one of her clients who had decided to delay claiming his
Social Security benefits until age 70 when they would be worth the maximum amount. For every year he postponed collecting benefits beyond his full retirement age of 66, he earned an extra 8% per year in delayed retirement credits up until age 70. As a result, he increased his monthly benefits by 32%.
Holding out for the maximum retirement benefit also means that any future cost-of-living adjustments would be worth more because they will be applied to a bigger base amount. And, if he dies before his wife, she would receive the largest possible survivor benefit worth 100% of what he collected.
The client eagerly looked forward to collecting his first benefit check in July. He expected to receive $3,138 per month. Imagine his surprise and disappointment when he received a letter from the
Social Security Administration stating he would receive just $2,216 per month. He turned to his financial adviser for answers and she asked me.
It turns out that the explanation was rather simple. Because he delayed claiming
Social Security until 70, he had been paying his Medicare Part B premiums out of pocket for the past five years. Now that he began receiving
Social Security, his Medicare premium would be
automatically deducted directly from his monthly benefit.
Most people who enroll in Medicare this year pay a base premium of $121.80 per month. Many people who enrolled before 2016 pay less. However, those whose income tops $85,000 if they are single or $170,000 if they are married pay high-income surcharges that can add $48 to $268 to their premium per month per person this year.
That explained $183 of the monthly deficit, but there was still more than $700 unaccounted for. When Ms. Egan quizzed her client, it turns out that he had requested Social Security to withhold a portion of his benefits for taxes. Ah-ha! Mystery solved!
“Once I realized this, we ran the numbers and it turns out the lower amount he got is the correct number,” she wrote.
Beneficiaries can ask Social Security to withhold federal taxes when they apply for benefits. Or, if they are already receiving benefits or they want to change or stop their withholding, they can fill out IRS form W-4V,
Voluntary Withholding Request and select the percentage to be withheld from their monthly benefits. The options include 7%, 10%, 15% or 25% that can be withheld for taxes.
It's a great example of all the moving parts involved in Social Security and Medicare and just how many details advisers need to keep straight. But clients expect nothing less.
A new white paper cites an “expectations gap” between the services that many clients expect as part of retirement planning and those that financial advisers provide. According to “The New Foundation of Retirement Planning: Social Security and Medicare,” 61% of clients expect Social Security advice but only 36% of advisers offer specific Social Security recommendations.
The report, compiled by Senior Market Sales, a firm that represents insurers and provides software and training on Social Security claiming strategies, said the gap is even larger when it comes to health care costs. Half of all clients expect health care advice, but only 13% of advisers provide it.
“Financial planners in this era of robo-advisers and technology-savvy do-it-yourself investors must seek ways to creatively add value to their services and to meet the expectations of today's new customer,” the paper concluded. “Financial advisers who can synthesize advice on a variety of complicated topics into a comprehensive retirement plan will provide value above and beyond what's available through technology alone and through traditional advisers.”
(Questions about new Social Security rules? Find the answers in my new ebook.)
Mary Beth Franklin is a contributing editor to InvestmentNews
and a certified financial planner.
