I called the national Social Security phone line last week to discuss survivor benefits. (More on that later.) Of course, the person I spoke with could not actually process my claim. Instead, he had to schedule a future telephone appointment to do that, with my local Social Security office. The first available appointment time was in August. Keep that in mind if you need to apply for a benefit that cannot be processed online. Before I called to file a claim, I did a lot of research on what I was about to do. Given my circumstances, determining the optimum filing strategy was quite complicated.
The Maximize My Social Social Security tool said that I should have claimed a survivor benefit when I turned 64 last December. The explanation was that some of the benefits that would be withheld from age 64 through age 66 would be re-paid to me as an add-on to the monthly from 66 through age 70, at which time I would switch to my larger, regular retirement benefit. This sort of made sense but there are other complications which the tool could not be aware of.
The first complication is Medicare. I have already written about signing up for Medicare Part A at age 65 because there is no cost to do so. Failure to sign up for Medicare Part A during the initial enrollment period around your 65th birthday can mean a permanent increase in all future Medicare premiums. There is an exception if you are working and enrolled in an employer-sponsored health insurance plan. This exception does not apply if your employer has fewer than 20 employees.
It is also important to note that the mandatory enrollment in Medicare at age 65 applies also to those who are receiving health insurance from an employer as a retiree. In other words, the exception only applies if you are still working for that employer.
I had decided not to apply for Medicare Part A at age 65 as a still-working employee because of another important rule: If you are on Medicare, you can no longer contribute to a Health Savings Account (HSA). I have an HSA at work and I am using it as a completely tax-free investment account for retirement. This HSA provides a tremendous financial benefit to me because of the tax savings and the employer contributions. As a single guy over age 55, I can add $4,350 to my HSA account each year, all tax free.
So here is where it gets even more complicated.
The law provides that if a person is receiving a Social Security benefit of any kind, that person will be automatically enrolled in Medicare when he or she turns 65!
The Maximize My Social Security tool did not know of the financial benefits I was receiving from using my employer’s HSA. If had applied for Social Security survivor benefits at age 64, I would no longer be able to participate in my employer’s HSA beginning at age 65. The monetary benefits of staying in the HSA exceed what I would receive in the extra “make-up” survivor benefits resulting from claiming the survivor benefit now.
As part of this research and analysis, I also learned that the Social Security survivor benefits that would be withheld while I was working will not be added as a “make-up” to a my Social Security retirement benefits when I switch to that benefit at age 70. In other words, only for the years 67-69 would my benefits be increased to make up for those that were withheld when I was working.
So my bottom line decision is to wait until full retirement age (66) to claim my Social Security survivor benefit because then the survivor benefit will be paid no matter what my employment income is. At that time I will lose the opportunity to participate in the HSA but the monetary value of the monthly survivor benefit will exceed the monetary value of continued HSA participation. When I turn 70, I will switch to my full retirement benefit, now enhanced by delayed retirement credits that give me 8% per year benefit increases.
My existing HSA will remain intact and can be used for any future medical expenses and/or for reimbursement of past expenses. This past week I reallocated my HSA funds to a mutual fund that is 100% stocks. This is an aggressive position but it makes sense because all of the earnings will be tax free if I withdraw them appropriately. I will allocate other retirement funds that are not tax-free to less risky investments.
The lesson here is that there can be lots of interplay between different retirement planning decisions, often with unexpected and significant financial consequences. It is best to think everything out before making a decision that may be irrevocable.