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Claiming early Social Security may not be the best strategy for high earners

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John Brenkovich was not about to let his client make the mistake that so many people in similar circumstances make: applying for Social Security early.

Aside from receiving a significantly reduced benefit for the rest of his life, the client would not, as he assumed, receive his benefit early. In fact, he would have to wait two years, when he hit his full retirement age, to see his first Social Security check.

The reason for the delay? He was making too much money, Brenkovich, an advisor and certified financial planner in Mamaroneck, New York, told the then 64-year-old widower.

Brenkovich explained that he would be subject to an “earnings test” if he claimed early. That meant half of anything he earned above the then earnings test limit of $15,720 would be withheld until he was 66. (The earnings test limit is now $17,040.)

Most advisors know about the reduced benefits from claiming early, but few are aware of the Social Security earnings test that can delay those benefits for an extended period of time for high earners, Brenkovich says.

In the case of his client, a professor of electrical engineering earning $150,000, the Social Security Administration would withhold a total of $67,140, which meant he wouldn't get his first $1,900 monthly benefit that he otherwise would have received immediately until he turned 66.

"When they do withhold that money because of an earnings test, they don't withhold it over 12 equal checks throughout the course of the calendar year," Brenkovich says.

While the money is withheld in a lump sum, it's not returned that way. In Brenkovich's client's case, the Social Security Administration would merely adjust the $1,900 monthly payment by a set amount over a period of time, according to Brenkovich.

"You do get the money back, but they don't give it back to you in a lump sum," says Brenkovich. "It doesn’t erase the sting of having that money withheld."

After explaining how the earnings test worked, Brenkovich was able to dissuade his client from claiming early at 64. He instead persuaded him to pursue a different claiming strategy that would give his client the greatest mileage from Social Security. He recommended that when he hit his full-retirement age at 66, he claim a survivor's benefit of $2,491 a month on his late wife's record, rather than his own. This would allow his own lower benefit of $2,192 to grow at 8% annually.

"There is a reasonable presumption of longevity that needs to be addressed and planned for," says Brenkovich.

The client — still emotionally raw from his wife's loss two years earlier — was unaware that he could claim a survivor's benefit. "I think in these types of scenarios, it can be a very personal and to some degree emotional experience, and so it requires empathy, lots of listening and most of all objectivity," says Brenkovich. "In the difficult period following the loss of a loved one, people appreciate objectivity."

With that in mind, Brenkovich advised his client to collect survivor benefits until his 70th birthday, at which point he would switch to his own work record. By then, his Social Security benefit would be $2,894 a month, or $702 more a month than it would have been at 66.

If the client lives to 85, he will have received approximately $640,488 in Social Security benefits on both his late wife's and his own work record. Had he claimed early at 64, he would have only received $478,800.

He will need the extra income given his good health and active lifestyle, in Brenkovich's view. "There is a reasonable presumption of longevity that needs to be addressed and planned for," Brenkovich says.

An earlier version of this story ran in February 2016. It has been updated throughout.

This story appears in Financial Planning’s August CE quiz.

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