Social Security milestone: what happens when clients turn 66

A baby boomers' 66th birthday means more than blowing out a lot of candles.

As far as Social Security is concerned the date is a landmark, and many of the program's critical features and benefits are linked to this age. Accordingly, advisors and their clients need to understand the options and choices available in order to maximize Social Security benefits and retirement income plans.

There are three milestone ages in the Social Security retirement program: 62, 66 and 70. The earliest age at which one is eligible to file for benefits is 62. Workers can't delay filing for benefits past age 70.

Between these two dates is the all-important Full Retirement Age (FRA), which for the vast majority of baby boomers is 66. For those born before 1955 FRA will be exactly on their 66th birthday. For those born between 1955 and 1959 it will be later in their 66^th year.

Here are four important program features that hinge on age 66:

Basic Benefit
Regardless of the age at which a person files for benefits, their actual benefit amount is calculated based on the age 66 FRA value.

File for early benefits (between 62 and 66) and clients will see their benefit amount calculated as a reduction from the age 66 value. File later (delay filing) and their age 66 benefit is increased by 2/3 of 1% for each month beyond their 66^th birthday that they wait before filing.

Earnings’ Test
The earnings’ test both confuses and irritates beneficiaries of Social Security. This feature may cause a portion (or even all) of retirement benefits to be withheld if the Social Security beneficiary is younger than FRA and is still working.

Dennis Brack

Here’s how it works. $1 of Social Security benefits are withheld for every $2 of earned income over $16,920 for clients between ages 62 and 65. $1 of benefits is withheld for every $3 of earned income over $44,880 in the year that a client turns 66. When a recipient reaches full retirement age (66) the earnings’ test goes away and no benefits are withheld regardless of income earned.

One important caveat is that any withheld income is actually paid back in the future. An actuarial adjustment will be made at age 66 increasing a client’s benefit in order to distribute the withheld income.

Beware that some beneficiaries still will not be satisfied since they don’t perceive the value of the adjusted benefit paid out over the remaining lifetime as equivalent to the recently withheld benefits.

Do Over
At 66 beneficiaries have a new option to second-guess their filing choices.

Some clients regret their decision to file for early benefits. They may have gained a new source income or assets, perhaps through an inheritance. They may have learned more about the mechanics of the Social Security system and realized the potential benefits of delaying filing and collecting a higher lifetime benefit. In either event, they may wish to change their decision to file. There are two mechanisms by which they can suspend benefits which have already started.

The first choice is available only during the initial 12 months after benefits begin. During that time beneficiaries may withdraw their application for benefits but must repay all benefits collected. At that point their future potential benefits will continue to grow as if they had never filed before.

The second choice is only available once a person reaches age 66. At age 66 or later one can suspend benefits. In this case no repayments are required. Future benefits will then grow at 8% per year, based on the benefit value when it was suspended, until age 70 years.

Restricted filing
Perhaps the most widely discussed feature unique to age 66 is the ability to use the Restricted Filing option. This special option is being phased out for younger applicants but is still available to anyone born before Jan 1, 1954.

Once a client is at least 66 they can file for Social Security benefits restricted to spousal benefits only. This is a benefit based solely on the work history of their spouse. Simultaneously the Social Security benefit based on their own work history continues to accrue valuable delayed retirement credits of 8% for each year until as late as age 70.

This powerful strategy can provide both higher family lifetime benefits for a couple and, very importantly, maximizes the benefit that the survivor will receive when the first spouse passes away.

Many consequential Social Security choices hinge on the pivotal age of 66. Keep these in mind and help your clients take full advantage of these important options.

Paul Norr is a certified financial planner with Bucks County Financial Planning Group in Westlake Village, Calif.