Five Practical Things I’ve Learned About Social Security and Medicare:
- Set up an online account with Social Security and get an annual statement of your future benefits each year as soon as you start earning any income.
A close friend of mine years ago had a tax return preparer transpose numbers in his social security number while completing forms for Social Security. This friend was self-employed, and effectively paid twice as much into the Social Security system as those persons who work for others. In that case, due to the error, his income was not properly credited to him. He only had three years to straighten it out with the government, or he would have lost the ability to count that income toward his future payments; and it took about that long with multiple communications and correspondence to correct the mistake.
Set up your Social Security online account as early as possible, or at least at the same time you are hired for your first permanent full time employment, and do not wait until you are close to full retirement. At that point any errors made when you were in your 20’s cannot be corrected.
2. Run math calculations before you elect to take Social Security payments early (at 62 years) or at “normal” retirement age (now about 66 years).
For years I never paid much attention to those annual statements from Social Security, other than to check that the government had properly accounted for my income each year for those future monthly payments in my golden years.
Then last year it was time to focus on the actual numbers, not for myself, but for my older spouse. We calculated that it was better for him to defer receiving Social Security monthly payments until the age of 70 because the monthly payments would be much higher (maybe $700 to $800 more per month). Being “almost” empty-nesters it made sense to wait since we still had one steady income for a full-time worker (me).
When I started practicing law years ago, most individuals were living to their 70s or low 80s. But now I have many clients living into their 90s, and a few who have lived for a century. Unfortunately, some of them who did not have good supplemental pensions from private employers in addition to Social Security are outliving their savings. For other individuals, those pension amounts and Social Security payments together are not keeping up with the increase in the cost of living.
If you plan to live a very long time, that extra monthly income from deferring Social Security payments may be critical for slowing down the inevitable invasion of the principal of your savings that occurs when you no longer can live independently.
3. When you elect to defer Social Security payments, you must set up automatic deductions of part B Medicare (medical insurance) payments from your bank account, so make sure you have adequate funds in the account to make those payments.
Although my spouse deferred actual Social Security payments, he is covered by Medicare, which means he is also required to pay for part B. For retirees who are receiving social security, the part B payment is automatically taken out of your account and is usually reflected in the bank statements along with the amount of Social Security payments deposited since all payments and deductions are now done electronically.
But when you defer social security payments, part B is not automatically taken out at first. You have to complete forms for automatic deduction and pay the first three months up front by check. Don’t worry though, the government sends you a notice with an explanation and a self-addressed envelope for you to mail the payment back. However, once you are on the automatic payment system you still may get monthly paper notices about the amount owed with a self-addressed envelope. Read it carefully, in small print in one corner you will see a statement that this is not a bill and the amount is automatically being debited from your account.
4. Your Part B payment for Medical Insurance will be in addition to the amount you pay monthly to another health insurance company for supplemental insurance.
Medicare Part A (Hospital Insurance) and Part B (Medical Insurance), do not cover the entire bill or cost of medical care, so most people buy supplemental health insurance, and the amount of monthly payments to that health insurance company will vary depending on the type of supplemental plan you choose.
In general, if an expense is a covered expense, Part B will pay 80 per cent after the applicable deductible is met, so most people pay for supplemental insurance to cover all or a portion of the 20 per cent Medicare Part B does not pay. Practically speaking, the type of “supplemental” health insurance you need may depend not only on your age and marital status, but also if you have other dependents (i.e. minor or adult children).
5. Whether you elect to defer social security payments or not, always look at your total income (including your spouse’s income if you are married) once you reach Medicare eligibility age.
The biggest shock to most people who are frugal and have saved independently for retirement to supplement their Social Security income is the monthly premium they have to pay individually for Part B.
In 2018, the basic Medicare Premium is $134 per month, and many people only pay that amount. However, others pay more than this base amount due to an income-related monthly adjustment amount (IRMAA) the Social Security Administration (SSA) uses. The SSA is allowed access to your IRS records. They look at those records two years before your retirement year to calculate your Part B amount. If you are married filing jointly the SSA bases that calculation on your both your incomes in that year.
The SSA definition of income is a modified adjusted gross income amount (MAGI) that includes your adjusted gross income (i.e. wages, capital gains, etc.) and also your tax exempt income, proceeds from the sale of property, withdrawals from an individual retirement account and conversions from traditional to Roth IRAs. (The figures used for single, head of household or qualifying widower are adjusted so most people will end up paying the same part B under the calculations whether they file jointly or separately; however, if you are married filing separately you are immediately placed in the highest bracket calculation, even if you would be in a lower bracket if you had filed jointly with your spouse).
As an example, let’s assume a couple had total modified adjusted gross income (MAGI) of $300,000 in 2016. At retirement in 2018, the former working spouse’s part B payment would be $134 plus an additional $214.60, for a total of $348.60 per month in Part B payments. In this situation, if the retiring spouse is no longer working the spouse can request a review to reduce the additional amount provided the “loss” of the spouse’s wage income puts the couple’s MAGI in a lower range bracket in the SSA tables, and the spouse submits appropriate proof of the event (i.e. letter from employer about retirement).
In another example, let’s assume a widow’s MAGI for 2016 was $300,000 due primarily to a $250,000 capital gain for selling the home she had lived in for 30 years. In 2018, her part B payment would be $134 plus $294.60 or $428.00 per month. However, the SSA will not reduce the amount of Part B payment since a one-time capital gain is not on the list of exceptions for reducing MAGI. The SSA reasons that the next year part B will be adjusted again (downward) since this event will not happen again.
Questions? Contact Dana Gentry for advisement at email@example.com or 941.748.0100. Dana is Board Certified in Wills, Trusts and Estates by The Florida Bar.