06 Nov Rethinking Retirement Plans After Changes To Social Security and Medicare
Over the past week, you may have heard some noise about major cuts to your Social Security Benefits and Increases of up to 52% on Medicare premiums. Not surprising.
Depending on your media outlet you frequent, you may have seen the following confusing headlines:
From those with positive spins:
- Budget proposal could mean no 52% jump in Medicare Part B premiums – USA Today, October 29, 2015
- Three Big Wins for Retired People In New Budget Act – AARP, October 30, 2015
- Chronology of Coverage for U.S. Federal Budget – New York Times, October 31, 2015
To those with negative view of the changes:
- Quit AARP For Endorsing Bipartisan Bill Cutting Millions Of Baby Boomers’ Social Security Benefits – Forbes, October 30, 2015
- Federal budget bill would kill Social Security loopholes – San Francisco Chronicle, Oct. 29, 2015
- Budget deal could mean less Social Security for couples – CNN Money, October 30, 2015
- DC Budget Deal Could Cost Some Couples Thousands in Social Security – Fiscal Times, October 30, 2015
Confused yet? You should be.
And as with any major bill passing through Congress, Americans are chiming in with, “Will these changes affect me personally?” “...and, by how much?”
The short answer? It depends. The longer answer? Read on to find out how these changes affect you and your retirement income planning.
What are the changes to Social Security and Medicare, and How do they affect you?
The Bipartisan Budget Act of 2015 is rare bipartisan legislation that raises our federal debt limit and builds a framework for a two-year budget deal. It was signed into law November 2nd, 2015 by President Obama.
The major changes affecting retirees can be broken down into two parts, Social Security, and Medicare Part B.
Changes to Social Security Claiming Strategies
The commonly used, “File and Suspend” strategy will come to an end in 6 months. This strategy has received quite a bit of attention over the last several years. One spouse could file for retirement benefits at full retirement age and immediately requesting that benefits be suspended. This allowed their benefits to grow till age 70. At the same time, the spouse could file for spousal benefits, and let their benefits grow till age 70. The strategy has been most commonly used when one spouse has much lower lifetime earnings, and thus will receive a higher retirement benefit based on his or her spouse’s earnings record rather than on his or her own earnings record.
In a provision labeled “closure of unintended loopholes,” the legislation effectively eliminates this strategy–if an individual chooses to suspend retirement benefits, neither the individual nor his or her spouse can receive spousal benefits during the suspension period. This provision will be effective in six months and applies to new file-and-suspend claims. Those who are both eligible and have implemented the file-and-suspend strategy before the six-month period ends will not be affected by the change.
Another strategy, the “restricted application,” that has been used to potentially increase retirement income involves one spouse filing for spousal benefits first, then switching to his or her own higher retirement benefit later. If a spouse reaches full retirement age and is eligible for both a spousal benefit based on his or her spouse’s earnings record and a retirement benefit based on his or her own earnings record, he or she could choose to file a restricted application for spousal benefits only, then delay applying for retirement benefits on his or her own earnings record (up until age 70) in order to earn delayed retirement credits.
The legislation eliminates this strategy. Anyone applying for either a spousal or retirement benefit is deemed to have filed an application for the other type of benefit as well. This change affects individuals who attain age 62 after calendar year 2015. Individuals who reach age 62 on or before December 31, 2015, will continue to be able to file restricted applications for spousal benefits once they reach full retirement age.
Medicare Part B Changes
According to the AARP article, How the Budget Deal Blunts Medicare Cost Increases, Tweaks Social Security, because of no Social Security cost-of-living-adjustment (COLA) for 2016, only 30% of Medicare beneficiaries were going to pay for the increase in Medicare Part B monthly premiums from $104.90 to $159.30. The budget deal lowered this to $120.00 per month. The reduction is financed by a $7.5 billion dollar loan from the US Treasury that will be paid through a $3 per month surcharge to the 30%.
You can read more on the 2016 COLA for Social Security with this press release, Law Does Not Provide for a Social Security Cost-of-Living Adjustment for 2016, on www.ssa.gov.
Why only 30% of the Medicare beneficiaries to pay?
When there is no COLA, the Social Security administration’s “hold harmless” provision protects most retirees from Medicare Rate increases. This rule states that no Social Security beneficiary paying the basic Part B premium can be forced to receive a smaller benefit in one year than they did the previous year. The rate increases will then be passed on to the remaining 30%.
Note: When there are Social Security COLAs, all beneficiaries will be subject to the surcharge.
Part B Deductibles Will Rise
The annual deductibles for Part B will rise from $147 to roughly $167 for all beneficiaries.
So, Where do we go from here?
Due to all the changes in retirement planning over the past decade, consumers are rethinking their retirement plans, once again.
We feel that the retirement income planning process can be broke down into 4 easy steps.
- Who Are You?…In Retirement™ – As you enter into retirement, understanding “Who You Are”, is key. Focus on building a retirement income plan around your lifestyle and retirement goals. Some of us plan to travel in retirement. Others may start a new business, or be a care-giver.
- Expenses – Retirement Income plans should be built to provide a degree of safety in such ways to guarantee the income supports your monthly expenses.
- Know what you own – We need to understand the differences between guaranteed and at-risk assets. The guaranteed assets should provide the income needed to sustain your lifestyle in retirement, with the at-risk assets making up for rising inflation, and unintended expenses.
- Know your risk tolerance – Understanding how much risk you are willing to take in retirement is a crucial point. Every family could have different risk tolerances, based on their own circumstances.
As you go forward into retirement, it may be good to use the Boy Scout motto, “Be Prepared.”