Many years ago, my uncle was offered early retirement from his manufacturing job. At 61 and in good health, Bill jumped at the option with thoughts of travel, grandkids and golf coming to mind.
Bills wife Joan--who was the same age--was not too excited at the prospect of having him around all the time, but resigned herself to his constant presence. Bill had looked at his company pension as well as his and Joans Social Security and decided they could have a fairly comfortable lifestyle for several years. Cashing in on several weeks of accrued sick and vacation days, Bill retired about three months before age 62.
What Bill had not considered was the most common mistake early retirees make: He did not look at the Medicare issue. Even though Bill qualified for early Social Security at age 62, he did not qualify for Medicare until age 65; theres no option to take Medicare early. Bill realized his mistake soon after his sick days ran out and he no longer had corporate health insurance. He called the Office of Social Security to sign up for Medicare and was told to please hold for a few more years.
There are two big mistakes people make when retiring before their full retirement age: they do not take medical costs or coverage into account and they do not consider the lifetime benefit reduction they are locking in for the rest of their lives. In Bills case, his full retirement age was 65 and a few months, and by retiring at age 62, he reduced that benefit by about 30%. Bill considered this, looked at his life expectancy, and thought things would work out.
What Bill did not realize was that he also reduced Joans benefit by about 30%. If you have been married for at least 10 years to anyone--including a former spouse--your retirement benefit is based upon the greater of your own earned benefit or half of your spouses benefit. Joan had not worked a lot during their child-rearing years, so half of Bills benefit was more than all of her own benefit. Joans family has a real history of longevity, (her mother died in her late 90s), and Joan expects to live until her mid-90s as well. When Bill retired early, he reduced his own lifetime monthly Social Security benefit, but he also reduced Joans lifetime monthly benefit. If Bill dies first, Joan will step up to his payment amount, but it will be the 30% reduced amount for the rest of her life.
So what happened? Bill continued his health insurance under COBRA for 18 months until he was 63 and �, and used a substantial amount of personal savings to buy major medical coverage for the 18 months until Medicare kicked in, at a cost of more than $1,900 per month for coverage for himself and Joan. In addition, he prayed that they didnt get sick for 18 months!
If Bill waited until his full retirement age of about 65, his benefit would have been about 30% higher. Plus, he and Joan would qualify for Medicare coverage. Additionally, Joan could have signed up for her own smaller Social Security benefit at age 62, and then when Bill started drawing at his full retirement age, she could step up to half of his benefit for the rest of her life.
If Bill dies before Joan, she would then also step up into his full higher benefit until she also died. Your Social Security benefit is reduced by about 8% for each year that you retire before your full retirement age (66 for most people), and will increase an additional 8% for each year you wait after your full retirement age, maxing out at age 70.
After talking about Bill and Joans problem, my next door neighbor Jean asked me about her Medicare coverage. Not yet 62, Jean had never worked outside the home and did not think she was qualified for any benefits. She had been married for more than 20 years and her husband had left her well off when he died several years ago. His employer provided health-care benefits as a widow but those were set to end when she reached 65.
What I was happy to tell her was that, by being married for more than a decade to someone who was fully covered under Social Security, she qualified to draw on his account as early as 60 and she was also fully qualified under Medicare when she reached 65. If Jean started drawing at age 60, her benefit would be greatly reduced, but for each year she waited, it would increase by roughly 8%. I did remind her that just like Bill and Joan, she could not qualify for Medicare until she reached 65, even if she drew Social Security at an earlier age.
In planning for Social Security retirement there are several things to consider: Medicare will not start before 65 for most people so plan for alternate medical insurance coverage; look at your own life expectancy to decide if you can make it on a reduced benefit for the rest of your life; and look at your family members life expectancy if they will draw based on your account to see if they can get by on a reduced amount.
Bob Jennings is a Certified Public Accountant, Certified Financial Planner and Enrolled Agent. Bob is the author of Understanding Social Security & Medicare. His website is www.ssmcare.com and you can find him on Twitter @Jenningsseminar.