Planning for Social Security? Don’t forget about the expenses
By Dan McGrath
Jester Financial Technologies
I've been hearing more and more buzz in the financial industry about Social Security. There are seminars daily on the subject, software programs by the dozens that help people plan for it, and whole practices that are designing themselves around it to build a better retirement for clients and prospects. However, what is the one little thing that everyone seems to forget? The expenses.
Currently, the rules are mandated by the federal government through the Program Operations Manual System (POMS) of 1993. According to POMS, in order to receive a Social Security benefit, a beneficiary must also accept Medicare when eligible.
The rule also states that certain Medicare premiums (including Parts B and D) and any surcharges imposed by Medicare must be automatically deducted from any Social Security benefit, as well.
The impact from this one rule is simple: Any person trying to calculate their expected Social Security benefit must realize that their expected Social Security benefits will most likely not be what they thought.
"So what? It’s only going to be a couple of dollars off; that won’t break my bank in retirement."
On the surface, this may not seem like much of a big deal, as Medicare premiums are not that substantial today. However, once the projected and historic rates of inflation are factored in (along with adding any possible surcharges), later in retirement, a beneficiary could quite possibly see their take home Social Security benefit decreased by as little as 15 percent or as much as 125 percent or more.
What we know from the Medicare Board of Trustees report is simple. In 1966, Medicare Part B premiums were initially only $3.00 a month. Today (almost 47 years later) they are $104.90 a month. That’s an inflation rate of 7.8 percent.
The Board is also projecting the inflation rates to be at least double that of any projected Social Security cost of living adjustment (COLA.) According to the Social Security Board of Trustees report the expected COLA for the foreseeable future (in theory) will be no higher than 2.8 percent.
With the not-so-far-fetched possibility of a beneficiary reaching the “surcharge” bracket, (where they will be deemed as a person of “high net worth”), your clients could possibly see their Medicare premiums increased by anywhere from another 40 percent to a whopping 220 percent. As you can imagine, this will also have a detrimental (but predictable) effect on their Social Security benefit. The other curveball, as we pointed out in our last article, “Possible Medicare changes: What you don’t know is going to hurt you”, is that these surcharges are currently being debated in Congress, with a possibility that they could be increased by as much as 50 percent. Consequently, a beneficiary may see their overall premiums skyrocket anywhere from 60 percent to 330 percent more.
So again, what does this mean for your clients today?
Most of them will come to the simple realization that as they age, their one guaranteed source of income from the federal government (the Social Security benefit that they paid for, incidentally), could become lower and lower each year in the future. It’s easy to envision the financial strain this will put on their otherwise carefully-crafted retirement plans.
The simple solutions:
1. Manage distributions in retirement to keep client income lower than the current and projected surcharge brackets
Today, these start at $85,000 for an individual, and $170,000 for a couple. However, Congress is debating lowering these amounts to $60,000 for individuals and $90,000 for a couple (an 11 percent and 46 percent decrease, respectively). The best way to manage these distributions? Utilize Medicare-free vehicles such as Roth IRAs and life insurance.
2. Work closely with your clients and make sure they understand that they will also need another form of guaranteed income in retirement. This need can be satisfied with a variety of annuity products. Coincidentally, the federal government suggests this as well.
It’s time to face the facts – there will be an adverse relationship between Medicare and our clients’ Social Security benefits.