Clients’ unplanned early retirements call for creating Plan B… and Plan C
by Marcia Mantell, RMA®, NSSA®Marcia Mantell is the founder and president of Mantell Retirement Consulting, Inc., a retirement business development, marketing & communications, and education company supporting the financial services industry, advisors, and their clients. She is author of “What’s the Deal with Retirement Planning for Women?”, the newly published “What’s the Deal with Social Security for Women?” and blogs at BoomerRetirementBriefs.com.
The 24 x 7 news cycle is gripped with COVID-19 coverage and the ensuing wreckage on our health care system, skyrocketing unemployment claims, shutdown of the economy, and a spiraling stock market. Not in our lifetime have we had to deal with such a severe health crisis and one that has such dramatic implications for so many. The most vulnerable group in the eye of the storm may be those in their early to mid-sixties. Not only do they have a higher-than-average probability of contracting this strain of Coronavirus, but they are in a group highly likely to suffer unplanned, and untimely, unemployment.
Early warning signs point to an unemployment rate worse than during the Great Depression, some 90 years ago. And, the economic fallout from this pandemic could last for many more quarters to come. Overall, the outlook ranges from less-than-ideal to downright dismal for clients approaching retirement.
Unprepared for Unemployment
Workers in their 60s often stay on the job to better prepare for their financial responsibilities in retirement. They are counting on several more years of employment to support super-saving efforts, reduce debt, and secure their households for pending retirement.
Many target their Full Retirement Age (FRA), when they receive their optimal Social Security benefits, as their retirement date. We know that working even one or two additional years can make a significant difference to long-term retirement financial success.
The possibility of losing one’s job is of increasing concern for many 60-year-old clients, even if they haven’t talked about it. It wasn’t in their plan. It isn’t Plan A. But, due to unforeseen circumstances, the potential for unemployment is real. And, clients will be unprepared and at risk for making poor decisions, especially around Social Security.
Reaching out proactively to each client in their 60s to review their plans for retirement income and to develop a Plan B and a Plan C should be at the top of every advisor’s priority list.
A Brief Historic Perspective
Not that long ago, we walked a similar walk. From 2008 to 2012, the unemployment rate took off like a shot as the economy fell into the great recession. Keeping in mind that economists consider the ideal unemployment range to be generally 3.5% to 4.5%, the ten years between 2008 and 2017 were less than ideal for older workers. The unemployment rate for those age 55 and older hit highs from 7.6% to 8.9% (See chart.)
Take a look at the unemployment rates at key dates during the great recession (Bureau of Labor Statistics):
Keep in mind that today’s 60+ workers’ have a Full Retirement Age from 66 to 67. Staying employed until that age was a critical part of a successful financial plan for retirement.
age 55 and older
ages 60 to 65
ages 65 to 70
6.8% (in Feb)
Month unemployment reached 7% or higher
Month of highest unemployment rate
Month unemployment rate returned to April 2008 level
Clients are likely considering early Social Security claims
When backed into a financial corner, clients who are eligible to claim Social Security benefits may well pull the trigger before the ideal time. Early claiming is not a new strategy. Between 2002 and 2011 Social Security reports that between 66% and 74% of men claimed benefits early. In 2018, the most recent data available, 49.7% of men claimed early.
The large majority of women have also been claiming before FRA. In 2008, 75.8% of women claimed early and by 2012, the rate had only dropped to 68.2%. In 2018, 54.6% of women claimed before FRA.
Advisors will be wise to consider which clients may be falling into this group during the Coronavirus epidemic, and help them guard against a knee-jerk reaction today that could have significant consequences tomorrow. Especially given the abnormal and drastic number of unemployment claims we’re seeing each week.
Strategies To Consider
Claiming Social Security early locks in permanently reduced monthly benefits. Clients who claim at age 62 lock in at least a 25% decrease in monthly income. This one decision can cripple a client’s financial future. Furthermore, if a man is married and claims early, he locks his wife into much lower survivor benefits if she was the lower-earner and becomes a widow.
When to claim Social Security is an incredibly important financial decision for both husbands and wives. It is even more critical given the current COVID-19 environment. Clients will value options from their financial advisor about how to approach constructing a Plan B and perhaps a Plan C before they make a nearly irrevocable claiming decision.
Clients who become unemployed between 62 and 65
This group of clients is particularly vulnerable to making sub-optimal Social Security claiming decisions. Their Plan A was to work until at least FRA. Now they are facing a nearly insurmountable employment situation – few may be able to find new work, and if they do, the salary is likely to be significantly reduced. They know they can tap Social Security and that option looks tempting.
Plan B: Assessing reduced Social Security benefits. Clients who claim early permanently reduce income into their households from Social Security; therefore, the draw from the portfolio increases or they make severe trade-offs to make ends meet. Neither option helps clients achieve their retirement dreams, and many will sacrifice legacy goals. Furthermore, married clients run a great risk of locking in too-low survivor benefits. The consequences to an early claim are real and serious.
Also remember that Social Security is further reduced when clients reach the month of their 65th birthday. He or she gets automatically enrolled in Medicare, and already-reduced monthly payments will be automatically further reduced for Part B premiums.
Plan C-1: Using the do-over strategy. Let’s say a client is furloughed but expects to return to his job. Or, perhaps he finds a new job shortly after a layoff. But he needs income now beyond unemployment. If he claims early Social Security, but returns to full employment within 12 months of his claim, he can request a Social Security “do-over”. He must repay all benefits that he received and Social Security stops payments. He returns to Plan A, and is back on track to claim at FRA or later.
Plan C-2: Suspending benefits at FRA. Some clients will not get a new job within 12 months of claiming Social Security early. However, they later have an option to request Social Security suspend benefits. This can only be done once a client reaches his or her FRA. Payments stop, but delayed retirement credits (DRC) are earned. When the client eventually reclaims at age 68 or 69 or 70, their monthly benefits are recalculated and they should receive a higher monthly payment.
Clients who become unemployed between 65 and FRA
Take a look at clients who are nearly at their FRA. Due to untimely unemployment, there are two scenarios to consider:
Plan B-1: Creating a short-term bridge strategy from cash. Some clients may have sufficient cash to tap from their emergency fund or from conservative investments. If the client was planning to claim Social Security after FRA, a short-term fixed income annuity may also provide a short-term bridge.
Plan B-2: Claiming Social Security benefits a few months early. Clients born in 1954 or 1955 have an FRA of 66 or 66/2 months. Claiming 5, 6, or 10 months early may not be a deal-breaker. Run the numbers. The monthly reduction for claiming early is .556 (up to 36 months). If the client’s FRA is July 2021, for example, and he claims in May, 2020, he’s looking at a 7.89% reduction in benefits. If he can let unemployment carry him for several months and then claim, he might only have to take a 3% to 5% reduction in benefits.
Keep in mind that clients who have already reached 65, will also be eligible for Medicare. Make sure to reduce their Social Security monthly payment for automatic Part B premium payments.
Clients older than FRA, waiting until 70 to claim
These clients have some built-in flexibility already. Their monthly income from Social Security will still be higher due to DRCs; however, they might need to adjust their income projections for not quite maximum monthly benefit payments.
Plan B: Mapping out a lower-than-planned benefit payment. If the client chooses to claim before getting all DRC’s, what are the potential long-term implications on their portfolio? Consider if their withdrawal rate is different today, and later when survivor benefits are less than planned, if applicable.
Plan C: Finding a new job. If these clients find new employment, the earnings limit test does not apply. While they may find themselves unexpectedly unemployed in the near term, they can look for another job. They will receive both salary and their Social Security benefits. Each year they work, Social Security recalculates their benefits and adjust upwards, if applicable.
Like slightly younger clients, they are Medicare-eligible. It’s critical that they enroll in Medicare right away so they don’t lose health insurance coverage.
Widows and Widowers Have An Additional Option To Consider
Any widowed clients who are age 60 or older are eligible for surviving spouse benefits. Plan A may have been to continue working then claim survivor benefits at their survivor FRA. Later they would switch and claim their own maximum benefits at 70.
Plan B: Determining the implications of claiming reduced survivor benefits now. How far from their survivor FRA are they? Can unemployment tide them over for several months? They might need to claim survivor benefits early, and that could affect when they claim their own, higher benefit. Perhaps they claim at FRA, or maybe at 68 instead of 70. Run new plans to see how these clients might make their best Social Security claiming decisions.
It’s going to be a natural inclination for many clients in their 60s to rethink Social Security. Especially if they are among the 20 million who have become unexpectedly unemployed. The implications of claiming early are often detrimental to a client’s financial foundation in their later years.
If we’re all lucky, this will be a short-lived, albeit painful, situation. Encourage clients to apply for all unemployment or small business loan options available for the first time due to COVID-19. Help clients consider the likelihood of returning to full employment before touching Social Security. And, engage in logical planning by running Plan B and Plan C options where possible.
This is new for all of us. Uncharted waters can make even the strongest clients anxious and looking for short-term solutions. Before a client derails the plan you’ve worked on together to create a secure retirement, proactively reach out and set up time to look at options. Your expertise is needed now more than ever.