Most financial advisors recommend that clients wait to claim Social Security retirement benefits until full retirement age or up to age 70. That is sound advice. But since the COVID-19 pandemic, more baby boomers are electing to start benefits earlier.
When claiming before age 65, they inadvertently turn on other benefits and can miss taking specific actions with Medicare and health savings accounts. Mistakes lead to unnecessary surprises and tax issues.
A Look at the Data
The Social Security Administration’s OASDI Benefits Awarded: Retired Workers tables report when men and women started claiming benefits. A recently released table shows claiming ages between 1998 and 2022, a period in which claiming patterns have changed significantly.
A few examples:
- In 1958, 58% of men claimed at 62. In 2022, only 28% claimed that early.
- In 1958, 62% of women claimed at 62. In 2022, fewer than 30% did so.
- Between 1998 and 2007, 79% of men claimed benefits before their FRA (65 to 65 and 10 months).
- In the same sequence, 82% of women claimed before their FRA.
The first boomers reached age 62 in 2008, just as the Great Recession was gripping the United States.
- In 2008, 82% of men claimed between 62 and FRA versus 60% in 2022.
- In 2008, nearly 85% of women claimed between 62 and FRA versus 62.5% in 2022.
Overall, baby boomers have made remarkable adjustments toward waiting to claim.
COVID-19 Hinting at a New Trend
As younger boomers approached retirement, they received better advice from their financial advisors about the value of waiting. Social Security also stopped advocating for early claiming.
However, the pandemic still affects older workers in significant ways. And we see the claiming trend turning — more boomers are once again claiming earlier than is ideal.
Time will tell if this uptick is isolated to COVID concerns.
Surprises When Claiming Before 65
Clients who claim between 62 and 64 and eight months receive a Welcome to Medicare packet about three months before the month they turn 65. They also automatically enrolled themselves in Medicare Parts A and B when they claimed Social Security.
Early filers need to be advised whether to postpone Part B. Otherwise, Social Security payments will be automatically reduced to cover their Part B premium.
Other hidden situations that result from claiming early:
- Part A cannot be decoupled from Social Security.
- When any part of Medicare is in place, they can no longer contribute to their own HSA.
- Clients must proactively call their payroll department to stop all contributions the month before age 65 — and two months before 65 if their birthday falls on the first day of the month.
Claiming After 65 but Before FRA
Clients who claim between age 64 and nine months and their FRA lock in a somewhat reduced Social Security benefit. Medicare Part A also comes attached to Social Security and may have been activated retroactively.
If filing for Social Security:
- Before the month of a client’s 65th birthday, Part A will begin on the first day of the month containing the client’s 65th birthday.
- Between age 65 and 65 and six months, Part A will be retroactive to their 65th birthday month.
- After 65 and six months, Part A will have started retroactively six months before the application date but not further than age 65.
Part B may or may not automatically start. Clients must proactively delay or enroll on time to start their Part B when leaving an employer health insurance plan.
Importantly, Part A’s retroactive period determines when HSA contributions must have been stopped. Otherwise, HSA contributions were ineligible, and clients may have a tax problem.
Connecting the Dots
Clients are often unaware of these hidden rules and the snowball effect of claiming Social Security earlier. They are counting on their advisor to connect these dots.
When clients claim Social Security, the timing details may start a small avalanche. Get ahead of these issues with each client by age 60. Otherwise, you may need to send out a rescue team.