A new year brings a new set of numbers and statistics that affect clients in different ways depending on where they are in the retirement-planning process.
The 8.7% COLA, announced last October and taking effect in January 2023, drew much attention to Social Security, especially among pre-retirees who were (a little too) eager to take advantage of it. No, we had to say many times, you do not have to claim your benefit to get the COLA. All PIAs are raised by the COLA whether or not benefits have started. The generous COLA was a public-relations coup for Social Security, providing an opportunity to remind everyone that as a source of retirement income, Social Security is one of the best. It keeps up with inflation and continues for life. And if you’re not in a big rush to take it, the higher amount you get by waiting can satisfy a big chunk of your retirement spending need.
A maximum earner who turns 62 in 2023 will have a primary insurance amount (PIA) of $3,653. This means that if he claims his benefit in five years at his full retirement age of 67, he’ll receive $3,653 per month—plus annual COLAs between now and then. If the COLA averages just 2% over the next five years, his PIA will rise to $4,033. And if he delays claiming to age 70, with three years of 8% annual delayed credits his first check will be $5,307. It’s no wonder Social Security now figures as an important source of retirement income, even among wealthier clients.
Annual Social Security planning should start with each client’s own benefit estimate. SSA revises benefit estimates annually, around the client’s birthday, taking into account the latest earnings and adjusting for inflation. We recommend that you start running claiming analyses for clients sometime in their late 50s and update them annually using their latest PIA estimate from SSA. (SSA’s statements now show benefit estimates for each year of claiming. When running the calculators use the PIA, which is the amount they will receive if they file at their FRA. The calculator will adjust for claiming age and COLAs). Clients can obtain their statements from their SSA account. For additional information regarding steps you can take before claiming Social Security, click here to navigate to the CRA article dealing with this issue. The annual Savvy Social Security claiming analysis will give you an opportunity to:
- Check the client’s earnings record to be sure the latest earnings were properly reported (while also checking for any errors in earlier years)
- Review their expected Social Security income in the context of their overall retirement income plan
- Formulate a claiming strategy and review it each year to see if it still holds or may need to be revised
- Ask about major life events (marriage, divorce, death of a spouse) that may affect their Social Security claiming strategy and other aspects of their financial plan
- Broaden the conversation to other areas of financial planning including insurance and portfolio management
If a client will be claiming Social Security in 2023, you can begin to hone in on their specific instructions to make the whole process go smoothly for them.
- Up to three months before they want benefits to start, they can go online and begin the application process. The application will ask for their start month. Sometimes clients are confused by this. You can help by clarifying their start month before they begin the application. For example, if the client will be applying at age 70, the start month will be their birthday month. The first check, issued the following month, will include the maximum delayed credits.
- If they are applying between FRA and age 70, they can choose their start month and the delayed credits will be prorated monthly. (However, credits for the current year will not appear until January of next year, as explained in this newsletter.) There’s nothing magical about their FRA month when it comes to claiming. If their FRA is 66 and 6 months and they apply at 66 and 7 months, they’ll get credit for that additional month.
- If your client is more than six months past FRA, SSA may offer to backdate their application by six months and give them a nice lump sum representing six months of retroactive benefits. Tell your client not to fall for it. If they do, their benefit going forward will be reset back to the amount it was six months ago—that is, 4% lower, permanently.
- If they are applying before FRA, they will be asked if they are still working and, if yes, will be asked to estimate their earnings for this year and next year. This will set off a series of cumbersome communications as SSA attempts to withhold benefits for the earnings test and then makes adjustments after earnings are reported. The monthly earnings test threshold in 2023 is $1,770 for anyone under FRA—that is, if a client earns more than $1,770 in any month after starting benefits, $1 in benefits will be withheld for every $2 earned over the threshold amount. Earnings prior to application will not count for the earnings test. (We recommend avoiding the earnings test altogether by not starting Social Security until the client stops working or turns FRA.)
- If a client will be turning FRA in 2023, the monthly earnings test threshold is $4,710 and the reduction is $1 for $3. Starting with the month the client turns FRA there is no earnings test.
Medicare does not usually appear on clients’ radar screens until they get ready to retire. Then they know they have to do something about health insurance. But clients really should start thinking about Medicare at least six months before they turn 65.
- Clients who are still working (or whose spouses are still working) and covered by an employer plan may keep that plan and delay Medicare. But Medicare eligibility at 65 presents a new set of options that clients should at least consider. To see how deeply you should delve into those options first consider the IRMAA. If the client’s income would trigger the IRMAA ($97,000 single, $194,000 joint), they are probably better off keeping the employer plan and delaying Medicare. But if the client would be subject to the base Part B premium only ($164.90 in 2023), they may be better off switching to Medicare depending on the premium-sharing arrangement they have with the employer. If they do drop the employer insurance and go onto Medicare, they’ll need supplemental coverage (about $200 per month) plus a drug plan. The point is, do not assume employer insurance is always better. Medicare may be a better deal, especially if the employer plan is a high-deductible plan and the client is starting to have some “health events.”
- Clients who plan to retire in 2023 will need to figure out where they will get their health insurance after they come off the employer plan. If they are 65 or older, they’ll be transitioning to Medicare, with all the plan shopping and enrollments that entails. Of equal consideration is the spouse: if the client’s retirement would cause the spouse to lose dependent coverage, they’ll have to figure out coverage for her. Options may include up to 36 months of COBRA (if they can afford it), Medicare (if the spouse is 65 or older), the spouse’s own employer insurance, or marketplace insurance through healthcare.gov.
- Clients who are already retired and who turn 65 in 2023 will need to see how their current retiree insurance works with Medicare. Some retiree insurance stops when the insured turns 65. If that’s the case the client will need to enroll in Medicare and get supplemental coverage. If the client can keep the retiree insurance, it will change so that Medicare becomes the primary payer the month the client turns 65. This means the client will need to enroll in Medicare in order for the retiree insurance to work. Even if they can keep their retiree plan, it wouldn’t hurt to compare it to plans in the marketplace. More employers are turning to Medicare Advantage for their retiree insurance, and that may not be best for the client, especially if they travel or otherwise spend time outside the plan’s service area.
- You’ll be getting plenty of reminders about this, but all clients will need some sort of Medicare planning during the fall open enrollment period that starts October 15. This may range from simply reminding clients to review their plans to actually taking them on a shopping trip to compare Medicare Advantage plans or drug plans (or referring them to a licensed Medicare broker who can help).
By Elaine Floyd, CFP®
Director, Retirement and Life Planning
For more CRA articles, click here.
If you are not getting your questions on this topic answered by your current financial advisor and would like to discuss working with us at California Retirement Advisors, you may request a meeting here.
Copyright © 2023, Horsesmouth, LLC Reprinted from Horsesmouth Newsletters, 02/14/23, with permission. https://www.savvysocialsecurity.com/article.aspx?a=98701, Horsesmouth, LLC takes no responsibility for the current accuracy of this article.
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