As you probably have heard 10,000 or so baby boomers are turning 65 each day. Some of you have probably already retired. Many are likely counting the days until they can leave the full-time workforce. Many more have exited the workforce ahead of their 65th birthdays in the past few years. For many of you, Social Security will be a major part of your retirement income. With that in mind, it is important to know how Social Security is changing.
With tens of millions of people out of work (thanks COVID), many Americans will face retiring earlier than expected. This will likely lead to many people claiming their Social Security benefits earlier than expected as well. Here are six Social Security changes that you need to know about now.
By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™
Six Ways That Social Security will be changing.
1) We Will Begin Dipping into the Social Security Trust Fund
Without some major action from Congress, the current excess trust fund revenue will be depleted by the year 2034. If this occurs, it is estimated that Social Security would only be able to pay less than 80% of the promised benefits from ongoing payroll taxes.
With the world falling into a recession thanks in part to the terrible handling of the coronavirus pandemic by the Trump administration, the Social Security trust fund will be under even more pressure. With less people working, fewer social Security tax dollars will be flowing into the Social Security Trust fund. Without changes to the United State Immigration Policy (combined with longer life expectancies), there will be fewer workers contributing to the Social Security trust fund when compared to the number of retirees receiving Social Security benefits.
Update: President Biden is now President and has shown more willingness to improve the health of Social Security. New Maximum Social Security benefits have been announced for 2022.
“The Social Security trust funds hold almost $2.9 trillion of the United States’ $28.4 trillion debt—more than the combined holdings of our top two foreign creditors, Japan ($1.3 trillion) and China ($1.1 trillion). So while many people believe that much of the U.S. national debt is owed to foreign countries, the truth is, most of it is owed to Social Security and pension funds right here in the U.S. This means U.S. citizens own most of the national debt”.-The Balance, October 8, 2021
2) Full Retirement Age For Social Security Has Increased
For those still a few years away from retirement, those born in 1960 or later, the full retirement age has increased to 67. You will still be able to start taking Social Security Retirement Benefits at age 62, but with reduced monthly payments. You must begin claiming Social Security by age 70.
3) Social Security Cost of Living Adjustment
Low inflation is a good thing for consumers, as it means pricing isn’t going up that quickly. On the other hand, lower inflation numbers mean small cost of living increases for your Social Security benefits. In case you didn’t know, your Social Security benefits may be increased each year, partially depending on inflation numbers.
For 2020, the Social Security cost of living adjustment was just 1.6%. Not life-changing, but if you are living off of Social Security alone, every penny counts. For the average retiree, this would likely amount to around $25 more per month. The highest earners, this could come closer to $50 more per month in Social Security retirement benefits.
In 2022 the Social Security Cost of Living Adjustment will be 5.9%.
4) Maximum Social Security Benefits Will Increase In 2022
For workers near the top of the Social Security income scale, $142,800 or more for 2021, your maximum Social Security payout will likely increase slightly in 2022. No individual at full retirement age can take home more than $3,011 per month, regardless of their pre-retirement income. This number can be increased by delaying Social Security until the age of 70. Oprah won’t get more than this at full retirement age, and neither will you.
Could you live off of $36,132 per year? I would not find that a pleasant standard of living here in Los Angeles. You can take home more than this amount in Social Security benefits if you delay your benefits until you reach the age of 70, but still, it would be tough to get by in most big cities.
In case you were wondering, waiting till 70 could increase your Social Security benefit by 32% compared with the starting benefit at 66. This takes the maximum monthly benefit up to about $3,895 per month.
5) More of Your Social Security Will be Taxed In 2022
Yes, your Social Security benefits are taxable. The amount that is hit with taxes will depend on household income levels. Just fifty percent of your benefits will be taxed if your income is between $25,000 and $34,000 as an individual. That goes up to $32,000 to $44,000 for a married couple, still another example of the marriage penalty.
Hopefully, everyone reading this will have more income than that to live off in retirement. If so, 85% of your Social Security benefits will be taxable. That is assuming you have an income in retirement above $34,000 (individual) or $44,000 as a married couple.
6) End of Two Great Social Security Maximization Strategies
File and suspend was a great social security maximization strategy that is no longer available to younger Americans. The last few baby boomers who were grandfathered into eligibility will turn 70 in 2020. Seventy is the latest you can wait to start your Social Security benefits.
I may joke that congress doesn’t do anything, but they did manage to take action to prevent people who reach full retirement age in 2020 (or later) from filing for a restricted claim of spousal benefits. Like file and suspend, this was a strategy to help smart couples maximize their Social Security benefits. Thanks a lot. Remember this when you vote in November. Again please vote in November.
Whatever your age, take a moment and register for access to your Social Security Benefit estimates. Visit ssa.gov, just take a few minutes and you will be able to find more information about Social Security, and more importantly, what it will mean for your retirement.
Make today the day you find out if you are on track for the type of retirement you want. What do you have to lose? Peace of mind today, hopefully a happier, healthier and wealthier retirement in the future. I hope you enjoyed this post about Social Security 2020.
Make sure you are working with a Fiduciary Financial Advisor who will help you strategize to Maximize Your Social Security benefits in retirement.
DAVID RAE, CFP®, AIF® is a Los Angeles retirement planning specialist with DRM Wealth Management. He has been helping friends of the LGBT community reach their financial goals for over a decade. Nightline has called him a “Tax Wizard in an Expensive Suit” He is a regular contributor to the Advocate Magazine, Forbes.com, as well as the author of the Financial Planner Los Angeles Blog. He has also made over 100 TV appearances as the LA Financial Advisor Follow him on Facebook or via his website www.davidraefp.com.
I have included these posts about past years’ changes to Social Security benefits to give you a sense of how things how Social Security benefits change from year to year.
Social Security Changes to Benefits and Taxes for 2019, what you need to know now.
Whether you are already collecting Social Security benefits, still paying into the Social Security System, or eyeing retirement there are some Social Security and Medicare Changes you need to know about that are here in 2019.
By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™
The 60 million or so Americans receiving Social Security Benefits will see a tiny 2.8% cost of living increase in their benefits. This is the biggest cost of living adjustment (COLA) in the past seven years. For the average worker, this works out to about $41 per month. For those who have maximized their social security benefits, this could be more like $80 to $100 per month in additional social security benefits.
The maximum Social Security Benefit for a high-income earner at full retirement age this year will be $2861. Could you live on that? This would barely cover rent and utilities in much of Los Angeles.
Social Security Changes and Medicare Part B Premiums:
The sad part of the Cost of living increase to your Social Security Benefits will be eaten up by new higher Medicare Premiums. Many Medicare recipients who have their premiums deducted from their monthly Social Security Benefits.
New enrollees into Medicare Part B as well as those who pay premiums directly will pay the standard premium of $135.50 per month in 2019. If you are a high-income retiree your premiums will be higher. Bet you didn’t know that Medicare premiums are tied to income, this seems to be a shock for many new retirees. Put another, healthcare and medicare are not free in retirement.
If you MAGI (Modified Adjusted Gross income) in 2018 was higher than $85,000 (INCLUDING TAX-FREE INTEREST!!!!) for a single person or $170,000 for a married couple you will be subject to a Medicare Surcharge in 2019. If you are subject to this surcharge costs range from $187.50 to $460.50 per person. This can end up being quite costly for a married couple with high income. Talk to your Fiduciary Financial Planner for the ways to minimize income driving up your MAGI, to help potentially lower your Medicare premiums.
Social Security Changes and Higher Income Workers
Changes to Social Security don’t only matter for retirees. Higher-income worker are being asked to pay more into the system for 2019. The wages that are subject to Social Security taxes have increased to $132,900. A nice salary, but hardly “RICH” for anyone raising a family or living on the coasts or other expensive parts of the country. It is estimated that this tax increase will hit roughly 12 million workers this year with an average cost of around $665. This number doubles for self-employed people in this income range.
In the grand scheme of things, this may not be life-changing for you. On the other hand, the Social Security Administration estimates this small change could bring in BILLIONS in additional tax revenue for 2019.
Working While Taxing Social Security
In 2019, if you take Social Security before your full retirement age, you will be allowed to earn up to $17,640 before losing any benefits. This is a whopping $600 increase from 2018. Hey, every bit helps.
Thinking of Early Retirement make sure you know about this Social Security Change:
Dreaming of Retirement at 62? Not out of the question, but it will take some strategic financial planning to get there.
You may or not be aware but the younger you are now, the higher your FULL RETIREMENT AGE for Social Security will be. Many people have a retirement age of 65 in their head, but for Social Security Full Retirement age currently starts at 66 and creeps up depending on when you were born.
What’s the big deal in regards to changing your retirement age? Well if you retire early (many people retire before their full retirement age, whether they are ready financially is another conversation), your benefits are based on how far you are from that FULL RETIREMENT AGE. So in simple terms, you will suffer a larger reduction in benefits the earlier you choose to retire.
These are not earth-shattering changes, but a few bucks a month compounded out over 30 or 40 years of retirement can make a big difference. I know I’ve been behind people at the grocery store scrounging the last few pennies to pay for their necessities. Make sure you are including Social Security, Medicare, and Long Term Care as part of your comprehensive financial plan. Don’t be afraid to ask your trusted Fiduciary Certified Financial Planner what these changes mean for you and your march towards financial independence.
Social Security and Medicare Changes for 2018 What you Need to Know
Each and every year we see some small changes to Social Security and Medicare. This year is no different. How much you will receive from Social Security during retirement, to the caps on payroll taxes to fund future benefits are just a couple of the common areas with changes. Medicare beneficiaries will mostly pay more for their health-care premiums in 2018. There are also changes to new income rules that determine your Medicare surcharges for 2018. Social Security Changes what you need to know about today.
Here are a few of the highlights of the Social Security changes in 2018. We even throw in some information about Medicare Changes for this yeas as well.
Good News – Cost of Living Adjustments for Retirees
Retirees will finally get a cost-of-living adjustment (COLA) of two percent. This marks the largest COLA increase in the past six years and results in an average monthly increase of $27 per person. For 2018, the average Social Security check will be an estimated $1404 per month and the maximum Social Security check at full retirement age is $2,788. If that doesn’t sound like a lot, you can dramatically increase that number by waiting until age 70 to collect Social Security benefits.
Bad News – Higher Medicare Premiums
It should be no surprise that Medicare premiums are on the rise. For many recipients, this increase will more than eat up the Social Security COLA. Most beneficiaries of Medicare will shell out around $134 per month for Part B in 2018. That’s up $25 per month from 2017 and just two dollars below the average COLA for Social Security.
More Social Security Taxes for Those Still working
Just about all you hear in the news is how taxes are going down for millions of Americans. Keep in mind that only applies to income taxes. The Federal Insurance Contributions Act (FICA), aka the payroll tax, is not going down. In fact, payroll taxes will be increasing for many workers and this is the money that actually funds Social Security.
The cap on income subject to payroll taxes increased by $1,200 to $128,400 this year. Employees and employers each pay 7.65% of the first $128,400 of income for 2018.
Included in the 7.65% is a 1.45% tax used to fund Medicare. The thing to point out here is there is no cap on this portion of the payroll tax. For example, anyone making more than $128,400 will still be subject to the 1.45% Medicare tax.
Additionally, single folks earning $200,000+ or married couples earning $250,000+ (another example of the marriage penalty) will pay an additional high-income medicare surcharge of 0.9% in 2018. To read how to avoid the Medicare Surcharge check click here.
Early Retirees can earn more and avoid the dreaded Social Security Claw back
For those who take Social Security early and continue to work, you will be subject to a potential benefit claw back/reduction in benefits. For 2018, the income limit is just $17,040 before you will begin losing benefits. That is a whopping $120 more than in 2017. Those who earn more will forfeit one dollar in benefit for every two dollars of earned income above $17,040.
For those at full retirement age this year (66), you can earn up to $45,360 in the months preceding your birthday without putting any benefits at risk. That is a $480 increase from last year. Those earning more than $45,360 will lose one dollar of benefit for every three dollars earned over that amount.
The good news here is these earning caps disappear once you reach full retirement age because the benefits lost will be restored in the form of higher benefits. In the grand scheme of things, it’s probably not that big of a deal, but it has surprised many people who continue to work part-time in retirement.
Full Social Security Retirement Age is Rising
For years it was thought that retirement began once you turned 65 years old. I’m sorry to be the one to tell you but that number has changed. Today, people born after 1954 should plan on retiring when they are 66. In addition, it will now cost even more for those who need to take retirement benefits early.
For example, people born in 1956, and who turn 62 this year, will have a full retirement age of 66 and 4 months to be exact. The earliest you are allowed to claim Social Security benefits is when you are 62 years old, regardless of when your full retirement age is.
Using this example, let’s assume a 62-year-old wants to take early retirement. In this case, that person would see their retirement benefits reduced by 26.67%. If you were eligible for $2000 per month at full retirement you would get just $1466.60 if you choose to take benefits at 62.
This is a higher penalty than someone born between 1943 and 1955 who would have had a penalty of just 25% for taking Social Security at the earlier possible age of 62. If this person chose to take benefits at 62 they would get $1500 per month. Assuming the same $2000 per month benefit at full retirement age.
The younger you are today, the older your full retirement age will be, and the larger the penalty for taking benefits early. The penalty is based on how early your benefits start compared to your full retirement age.
Changes to Medicare Surcharges
Would you believe high earners in retirement are defined by a modified adjusted gross income (MAGI) exceeding $85,000 for individuals? That number doubles to $170,000 for couples. Make more than these incomes and you will pay even more for both your Medicare Part B and Medicare Part D insurance premiums. Part D is the prescription drug plan.
The underlying premiums for Part B remain the same this year with a range between $187.50 to $428.50, per person, per month. Keep in mind the income tiers that set those premiums have changed. Your surcharges in 2018 are based on your 2016 tax returns so if you had income above $133,500 single / $267,000 married, you will pay higher Medicare premiums in 2018. In case it wasn’t clear, full Medicare benefits aren’t free in retirement.
The Cost of Qualifying for Benefits is Rising
To qualify for Social Security and Medicare you must earn at least 40 credits. You receive up to four credits per year of work. For 2018, each credit represents $1,320 in earning which is up $20 from last year. To earn the maximum four credits per year, you will need to have a MAGI of at least $5,280 for the year.
Yes, Social Security Benefits are Taxable
I hate to break it to you, but Social Security benefits are taxable if you make too much money. That number is not some huge income that will have you living a glamorous and rich lifestyle.
Social Security benefits are taxed based on your combined income. This will include your adjusted gross income, plus tax-exempt interest (from things like Muni Bonds) and half of your Social Security benefits. This applies to people earning between $25,000 and $34,000. Once your income surpasses $34,000 you will pay taxes on 85% of your Social Security benefits.
The numbers are slightly higher for married couples. Couples earning between $32,000 and $44,000 will have to pay taxes on 50% of their Social Security benefits. Those with incomes more than $44,000 will have 85% of that number being taxed.
These may not sound like earth-shattering changes, but when you are on a fixed income every penny counts. Also, these changes could have potentially dramatic effects when compounded out over 30 or 40 years of retirement. I know I’ve been behind people at the grocery store scrounging the last few pennies to pay for their necessities.
Connect With David Rae, Financial Planner LA
David Rae, CFP® AIF®
President / Founder DRM Wealth Management LLC
1(323) 905-4380
david.rae@financialplannerla.com
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