From January 1, 2011 to December 31, 2029, approximately 10,000 Americans will reach age 65
each and every day. Currently about 159 million people work and pay Social Security taxes.
Monthly, Social Security benefits are paid to about 55 million people and about two-thirds of
them are retirees. For 2012, Social Security taxes are paid on earnings up to $110,000 by
employees at a rate of 4.2 percent and by employers at a rate of 6.2 percent. In addition, all
earnings (wages or net self-employment) are subject to Medicare tax. Employees and employers
each pay this at a rate of 1.45 percent.
For the average wage earner, Social Security will replace about 40 percent of earnings after
retiring. It is estimated that, to live comfortably in retirement, at least 70 percent of preretirement
earnings will be needed.
Through adjustments to the Social Security system, full retirement age (FRA) is gradually
moving to age 67. The chart below shows your FRA:
Year of
Birth FRA
1943-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67
Even though the FRA has moved from 65 to 67, attaining age 65 still has some important
ramifications. You should still apply for Medicare benefits within a 7-month window of your
65th birthday. The three months prior to your birthday, the month of your 65th birthday, and the
three months following that milestone day mark the window. If you miss this “initial enrollment
period window,” your medical insurance (Part B) and prescription drug coverage (Part D) may
cost you more money each month for the rest of your life.
Not signing up during the “initial enrollment period” means you will have to wait until the
“general enrollment period” from January 1 to March 31 and your coverage won’t start until July
1. Worse than that though is the fact that you will pay a 10% premium penalty for life for each
year you delay in signing up for Part B. However, if you are still working at age 65 and you are
covered by your employer’s plan and your employer has 20 or more employees, you don’t need
to sign up for Part B until the “special enrollment period.” This so-called “special enrollment
period” runs from your 65th birthday while you continue to be employed and covered by your
employer plan and for eight months after you stop working. Enrolling a couple of months prior
to ending your employer coverage should avoid a coverage gap and should steer you clear of
late-enrollment penalties.
Also, upon reaching your FRA you can “file and suspend.” Use of this technique involves filing
for benefits at FRA, but suspending the collection of the benefits until sometime later, generally
age 70, but anytime between 66 and 70. Using this feature of the system can be beneficial to
married couples because they can mix and match benefits in ways that are unavailable to singles.
If one spouse files and suspends it gives the other spouse the ability to claim a spousal benefit
(one-half of the other spouse’s suspended benefit). The spouse who suspends will continue to
grow their retirement benefit at a rate of about 8% per year. For more information on delayed
retirement credits, go to www.socialsecurity.gov/retire2/delayret.htm. To analyze your many
options and develop a personalized strategy, Kiplinger’s Social Security Solutions online tool
will guide you through the thousands of permutations at
www.kiplinger.socialsecuritysolutions.com. At this site, the do-it-yourself process is $49.95 and
the telephone guided option is $124.95.
You can take benefits early at age 62, but your monthly amount will be 25 percent diminished
from what it would be at FRA and, if you decide to wait until age 70, your monthly benefit will
be about 32 percent more than at FRA. Generally if you wait until age 70, you will need eleven
years to recoup what you could have had if you started at FRA. At age 60 or before, it is a good
idea to check your Social Security statement online to make sure the system data is accurate and
to begin to plan for age 62, age 65, FRA, and age 70. What choices do you face for taking Social
Security benefits? What are your Medicare enrollment options? And how will you and your
spouse coordinate these choices, selections, and solutions, to maximize your retirement and
health care benefits. Your professional advisors can help you evaluate these choices and
solutions as well, call on them early and as necessary. I plan to cover more about this topic in the
months ahead.
*Doug Parham, CPA is a partner with the firm of Boldt, Carlisle & Smith LLC, Certified Public
Accountants, which serves clients throughout the Willamette Valley and around Oregon from
offices in Salem, Stayton, and Albany. He can be reached at (503) 585-7751 or at
dparham@bcsllc.com. For more information please see www.bcsllc.com.