CFP - Retirement Savings and Income Planning (18% of the exam) - Section F.45

Social Security and Medicare planning

Eligibility and computation of retirement, spousal, survivor and disability benefits, full retirement age, early and delayed claiming adjustments, the earnings test, taxation of benefits, and Medicare Parts A, B, C and D with enrolment windows, IRMAA surcharges and Medigap coverage.

Social Security ActMedicare Parts A, B, C and DIRMAA

Practice question for this objective

Free sampleRetirement Savings and Income Planninghard

Delia is 63. She claimed her Social Security retirement benefit last year and receives 1,800 dollars a month, so 21,600 dollars for the full year. She has gone back to consultancy work and will earn 40,000 dollars of wages this year. She will not reach her full retirement age of 67 at any point during the year. Assume the annual exempt amount under the retirement earnings test is 23,400 dollars for a beneficiary who is below full retirement age for the whole year, and that 1 dollar of benefit is withheld for every 2 dollars of earnings above that amount. How much of this year's benefit is withheld?

ANothing is withheld, because the earnings test stops applying once a worker has already claimed a retirement benefit
B5,533 dollars is withheld, so 16,067 dollars of her 21,600 dollar annual benefit is paid this year
C8,300 dollars is withheld, so 13,300 dollars of her 21,600 dollar annual benefit is paid this year Correct
D20,000 dollars is withheld, so 1,600 dollars of her 21,600 dollar annual benefit is paid this year

The retirement earnings test withholds one dollar of benefit for every two dollars earned above the exempt amount until the beneficiary reaches full retirement age. The test looks only at earnings above the exempt amount. Wages of 40,000 dollars less the 23,400 dollar exempt amount leaves an excess of 16,600 dollars. Dividing that excess by two gives withholding of 8,300 dollars, and 21,600 less 8,300 leaves 13,300 dollars paid for the year. Two further points matter for planning. The withholding is not a permanent loss: at full retirement age the benefit is recomputed to give credit for the months in which benefits were withheld. And the earnings test ceases entirely at full retirement age, so once Delia reaches 67 she may earn any amount without any withholding at all. The one dollar for three dollars fraction and the higher exempt amount apply only in the calendar year in which full retirement age is attained, and only to earnings before the birthday month.

Why A is wrong: This confuses the event that ends the earnings test. The test ceases when the beneficiary reaches full retirement age, not when the benefit is first claimed, and Delia is four years short of hers.

Why B is wrong: This divides the 16,600 dollar excess by three rather than by two, applying the more generous withholding fraction that belongs to the calendar year in which a beneficiary actually attains full retirement age.

Why C is correct: Earnings of 40,000 dollars exceed the 23,400 dollar exempt amount by 16,600 dollars, and withholding one dollar for every two dollars of that excess gives 8,300 dollars, leaving 13,300 dollars payable.

Why D is wrong: This halves the whole 40,000 dollars of wages instead of only the part above the exempt amount, which ignores the 23,400 dollars of earnings the test allows her to keep free of any withholding.

See more CFP practice questions, answers explained.

Exam traps in Retirement Savings and Income Planning

Answers that look right on this material and are not. Each one is a distractor from a different question in the CFP bank for this domain.

File now at 69, because delayed retirement credits are forfeited altogether if the worker is still in paid employment when he files
Why it is wrong: Delayed retirement credits depend only on months of non-payment after full retirement age and are unaffected by continued work, and the earnings test that could otherwise reduce benefits has already ceased at full retirement age.
Claim her own reduced retirement benefit at 62 and switch to the survivor benefit at her full retirement age of 67
Why it is wrong: This uses the switching idea in the wrong direction. Her own record produces the larger figure at 70, so parking permanently on a 2,100 dollar survivor benefit from 67 forfeits the growth she could still earn on her own record.
She must take Part B at 65 or accept a permanent late enrolment penalty, because the group plan turns secondary to Medicare on her sixty fifth birthday
Why it is wrong: With an employer of this size the group plan remains the primary payer while she is actively employed, and that active employment coverage is precisely what protects her from any late enrolment penalty on Part B.

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