Key Elements

What is it?
Social Security optimization is considering multiple options available and then deciding the best strategy for claiming your (and your spouse’s) Social Security Benefits during retirement. The rules are voluminous and, at times, hard to interpret.

Why does it matter?
Social Security is the largest retirement asset for most people. If retirees take an overly simplistic approach to claiming Social Security benefits, they can leave a lot of money on the table. Some strategies can generate up to $100,000 in additional benefits.

How do people get it wrong?
Most people don’t do the analysis or know what options they have for claiming Social Security. These assume claiming early is the best choice. Many people simply claim their benefits when they retire versus adjusting their claim based on careful consideration of the rules, as well as the impact of their benefits on taxes and Medicare premiums. A smart income strategy “coordinates” your Social Security benefits with your drawdown and Medicare premiums.

What is it?
A retiree’s monthly Medicare premium can increase 2000% if they don’t carefully consider the impact of their income strategy on their income. There are set income thresholds that will trigger higher Medicare premiums and retirees can avoid it a smarter strategy.

Why does it matter?
Pay less, keep more. Even the smallest increases in monthly Medicare premiums can add up over a long retirement. A proper income strategy will keep your Medicare premium costs lower. Retirees may adjust the level of retirement income they drawdown so they don’t exceed the income thresholds, thus avoiding increased Medicare premiums.

How do people get it wrong?
Retirees and advisors may neglect the impact of the Medicare premium increase that results from an increased income. Your income strategy in retirement should be carefully coordinated with the benefits of Social Security, along with the Medicare premiums a retiree is likely to pay.

What is it?
Out of pocket healthcare costs will account for a significant portion of expenses in retirement, particularly in the later years. It is a future liability and should be planned for when determining your income strategy for retirement.

Why does it matter?
Rising costs in healthcare combined with the natural aging process can make this a significant determinant of how long your money will last in retirement. In home or nursing home care for elderly or disabled retirees can be very expensive. Most types of insurance do not provide coverage for such care, so that impacts how long retirement savings will last. Funding a Health Savings Accounts (HSA) or purchasing Long Term Care (LTC) Insurance are two simple ways a retiree can mitigate some of this risk.

How do people get it wrong?
Most people don’t plan for healthcare expenses when considering their withdrawal strategy. Your medical expenses in retirement is like a future liability. Retirees should consider saving some of their assets they hold in a tax deferred account to offset the anticipated healthcare costs in the later years.

What is it?
If you have a Traditional IRA, you can convert part or all of the account to a Roth IRA. You pay taxes as if you withdrew the entire amount converted, but without any penalty for early withdrawal; in return, the money will grow tax-free in the Roth IRA, and you will not pay any tax on that withdrawal if you meet the Roth IRA distribution rules.

Why does it matter?
The benefit of a Roth conversion depends on your current tax bracket as well as your expected tax bracket. If your current tax bracket is lower than it will be in the future, it may make sense to do the conversion now. Paying less taxes means you get to keep more of your money.

How do people get it wrong?
Retirees may not realize their sources of income may increase the later years of retirement and suddenly push them into a higher tax bracket. For example, if you delay Social Security until after 70 and you have to start taking the Required Minimum Distribution (RMD) from your traditional IRA at 70.5, your income in retirement may now exceed the level of income you had in the earlier years of retirement. It would have been a missed opportunity to convert to a Roth in the years the income bracket was lower.