How Social Security Changes Affect Pre-Retirees Who Didn’t Turn Age 62 by 2016 – Part 1/3

January 12, 2017

This series will address concerns of three pre-retirees who did not turn 62 by December 31, 2015.

Advisors, take heed! Many clients who did not meet the grandfather window for the recent Social Security changes took a tough hit. Much has been written about the how recent changes affect those who are 66 by April 29 (or, possibly September 1), 2016, or who turned 62 by the end of 2015.

This is the first in a three part series where we will address the significant concerns of three different pre-retirees who did not turn 62 by December 31, 2015 and uncover some possible retirement income strategies to assist with their retirement goals.

My neighbors, Steve and Sandy, planned to retire in 2016, when they attain age 62, under their full retirement age (FRA). They saved. They didn’t panic and sell during volatile markets but their retirement income plan was just dealt a serious blow. Why?

The Restricted Application claiming strategy they planned to use would have created a cash flow, and allowed Sandy – who has the higher benefit – to defer claiming that benefit until age 70. This would have reduced lifetime income they needed from other sources, allowing a portion of their savings the potential to grow over a longer period of time.

But they were victims of the recent Social Security changes and now have some concerns about outliving their money. While they can still use Social Security benefits as a COLA-adjusted longevity risk hedge, it may be riskier to do so. If they both ‘underperform their life expectancy’, the funds they used while waiting to claim Sandy’s benefit may not go to their children.

Now, with a greater possibility of outliving their money, they are concerned their only solution is for Sandy to keep working, even if only part time.

Can Steve and Sandy retire on time, and still have a reasonable longevity risk hedge?

Social Security may still be a good, COLA-adjusted longevity risk hedge. It may also carry more risk than they desire. As Steve and Sandy are not grandfathered, their Social Security choices are simple. Let’s look at three different strategies they might consider and some potential issues with each strategy.

1. One Claims, One Waits

Steve claims at 62, creating cash flow to help support their retirement. Sandy waits until age 70 to claim, gathering DRCs (Deferred Retirement Credits). Her benefit creates a higher lifetime payment with a COLA (Cost of Living Adjustment).

Potential issue: They will need to make up the lower cash flow with their other assets.

2. One Claims Now, The Other at FRA

This allows Steve and Sandy to retire as planned. If they still want a longevity risk hedge, they will need to use their assets to create COLA-adjusted future income.

Potential issue: They will likely need a longevity risk hedge to produce later life income.

3. Both Claim Now

If they both claim now, they will both have a reduced benefit. While their initial cash flow is good, as time passes, they will need more from their assets to help keep their purchasing power level.

Potential issue: Permanently reduced income likely means a greater need for later life income and a longevity risk hedge.

Consider an Alternate Strategy

One possible longevity risk hedge is a DIA, or deferred income annuity. Steve and Sandy could purchase a DIA with a portion of their non-qualified assets. By selecting a ‘mid-range’ payment start date of age 80, they can create flexible access to additional lifetime cash flow. They chose Joint Life with Cash Refund as a payment option, allowing any premiums not distributed to go to their children as the beneficiaries.

Steve will claim his Social Security at FRA. Their DIA will provide a longevity risk hedge. If they don’t use the money, it will go to their beneficiaries.

Next time, we will meet Tom and Tammy – and discuss how planning before age 60 can provide additional flexibility.

Federal laws and Social Security rules are subject to change at any time. For more details, go to

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