Social Security Age Change Leaves Some Clients Short
While the spotlight might be on a Donald Trump-inspired push to raise the retirement age for Social Security benefits, some advisors are pointing out to clients who are about to turn 62 that changes are already on the way.
Understanding the math of such entitlement wrinkles, they say, is going to be critical in coming years – whether a Republican-controlled Congress makes new reforms or not.
“While the same basic factors going into retirement planning still apply, those reaching age 62 this year should be aware that delaying filing by a few months could positively impact their benefits outlook,” says Jim Blankenship, an advisor in New Berlin, Ill., who charges by the hour.
That’s due to an amendment dating back to 1983 which kicks in this year. It mandates that the full-retirement age will go up for those born between 1955 and 1960. For such birthdates, revamped calculations will boost the FRA from 66 to 67.
This year marks the first wave of those in such a demographic reaching age 62, the minimum for claiming Social Security benefits.
“Since the top FRA number is moving up from 66 for this age group, it’s going to make decisions to retire early hurt even more,” says Tony Perrone, managing partner of the Estate and Business Planning Group.
The Altamonte Springs, Fla.-based advisor, whose firm manages more than $400 million, is making sure to let those clients know that claiming benefits at age 62 could mean losing anywhere from 20% to 25% of their full-retirement age benefits.
Younger clients still waiting to retire aren’t going to have much wiggle room, since their FRA is locked in at age 67, Perrone notes.
“But people turning 62 now need to realize that the FRA calculation isn’t going to be determined by a static number – figuring out their retirement options is going to be more of a revolving door over the next five years,” he says.
The FRA increases for those born between 1955 and 1960 are scheduled to occur in small increments. “Clients in that age group will see the FRA go up every two months – so every different birthday month is going to have a different calculation in terms of claiming benefits,” Perrone says.
That could make retirement decisions a bit dicier.
“The effect of pushing out the FRA is that people who are just turning 62 are basically facing a lifetime reduction in their benefits,” says Ash Ahluwalia, president of National Social Security Partners in New Brunswick, N.J.
His firm offers Social Security planning for a flat fee to clients of CPAs, lawyers and other financial advisors.
Ahluwalia isn’t just letting clients know about coming hikes in the FRA math for new retirees, though. He’s also warning that such tweaks also figure to impact calculations on how their earnings are applied to any future Social Security benefits.
In 2017, the “earned” earnings limit – as opposed to investment earnings – is set at $16,920 for someone applying for Social Security early at age 62, according to Ahluwalia. For every $2 earned over that amount, he adds, in effect $1 in benefits will be withheld.
“Extending the full-retirement age for those turning 62 this year is causing a double whammy in Social Security planning strategies,” Ahluwalia says.
On the one hand, even slightly higher FRA hurdles figure to put a dent in benefits available to clients over time, he points out. “But another practical implication is that by extending the earnings test,” Ahluwalia says, “more people are going to have to work longer and push out their filing age.”