Page 27 - Investment Advisor July/August 2021

They were very pleased with how this problem with the advice they received. the lower earner will be paid their own
worked out, and Lucia applied for her There are two other major flaws: smaller benefit in addition to a spousal top-
early benefit. And then they called me. 1. Lucia will not receive payments up. The rule is that spousal benefits always
They were quite dismayed that I was not from Social Security! are based on the higher earner’s primary
enthusiastic about this plan. Another easy-to-miss connecting insurance amount — not the amount the
dot is the earnings limit test. The advi- higher earner actually receives.
WHAT WENT WRONG? sor didn’t ask for details about Lucia’s For example, if the higher earner
The first issue is that this couple will freelance income. She estimates she’ll claims at 63, he’ll receive a reduced pay-
not get $1,380 in extra cash each month. bring in at least $50,000 this year from ment. But if the lower earner claims at
They will both start Medicare this year. a multi-year contract, plus $40,000 her own FRA, she doesn’t receive half of
Part B premiums will come right off the already lined up for 2022. his reduced payment, but rather half of
top. Unfortunately, the advisor failed Because Lucia will not reach her FRA his calculated PIA.
to factor in Medicare. Nor did It’s the same situation when
he take into account their modi- The first issue is that this the higher earner waits until 70,
fied adjusted gross income from as Tony plans to do. He’ll get
two years ago. That’s the income couple will not get $1,380 a 32% bump in his benefit to
Social Security will use to deter- $3,800. Lucia, however, never
mine their Part B premium. in extra cash each month. gets $1,900. Her maximum ben-
Turns out, they are a higher- efit remains locked at half of his
income household. In their case, They will both start $2,800 PIA, or $1,400, for as long
they fall into the second income- Medicare this year. Part B as she waits until her FRA.
related monthly adjustment
amount (IRMAA) tier. Each will premiums will come right THE RESULT
be assessed a Part B premium The advisor mistakenly assumed
of $297 per month, considerably off the top. Unfortunately, that Lucia gets half of Tony’s
higher than the standard $148.50. $3,800 payment. He’s overstated
In addition, they will pay $31.80 the advisor failed to factor her ultimate benefit payment by
per person per month for the $500 per month.
Part D IRMAA. in Medicare. Tony and Lucia were very
That means their “newfound disappointed to learn all of this.
cash” will drop almost 50% to $722 per of 66 and 4 months until 2023, she is Lucia ended up pulling her applica-
month. And the advisor didn’t mention subject to the earnings limit test. Any tion for her own early, reduced Social
their benefits would be taxed at their income over the current $18,960 thresh- Security benefits. Therefore, Tony
ordinary income tax rate. And these old will create a clawback of her ben- cannot use the restricted application.
aren’t even the most concerning issues. efits. In her case, her income reduces Overall, these adjustments were the bet-
What else is missing from this analysis? her payments in 2021 to zero, and likely ter option when all the pieces of their
This is not meant to be a throw-some- zero in 2022 as well. situation were connected.
one-under-the-bus situation. Rather, it’s The one bright spot is that she’ll The caution for financial advisors
a real example of how easy it is to miss effectively eliminate her permanent when one spouse is still grandfathered
the connecting dots when an advisor is reduction in benefits when she reaches into the restricted application: Connect
asked a specific question out of context. her FRA. But the planned-for $1,380 all the dots. What seems like a good idea
It’s critical to take a step back and insist in extra cash has dwindled to just $171 and newfound cash might just backfire
on a more comprehensive picture. per month — the residual from Tony’s for the couple.
As we noted, the advice they got did spousal benefit after Medicare Part B
not factor in Medicare premiums and premiums are pulled out. Marcia Mantell is the founder and president
their IRMAA additional cost for Part B. 2. Estimate of Lucia’s spousal ben- of Mantell Retirement Consulting Inc., a
Also, their actual Social Security checks efit when she reaches FRA advice retirement business development, marketing
Adobe Stock receive as much extra cash as they were often are misinterpreted, especially when & communications, and education company
was flawed.
would be cut in half, and they would not
Spousal benefits for the lower earner
supporting the financial services industry,
promised. But that is not the biggest
advisors, and their clients.
JULY/AUGUST 2021 INVESTMENT ADVISOR 25