Ask the Advisor: November/December 2023

Ask the Advisor: November/December 2023

What are the most common stumbling blocks to maximizing Social Security and Medicare benefits?

Q: Can you tell me the most costly misconceptions about Social Security and Medicare in terms of retirement income and healthcare? What tips do you have to maximize our benefits and minimize our expenses?

A: You ask a thoughtful question that’s useful no matter what age — and especially if you are in the planning stages for retirement. But even if you’ve been retired for several years, it’s important to annually evaluate how well your household budget in retirement matches what you planned and target areas that you can work to adjust. Here are the three places where nearly everybody gets tripped up:

Starting benefits too soon. About 6 out of 10 Social Security recipients in TSCL’s most recent Retirement Survey say they retired younger than full retirement age and that their Social Security benefits are permanently reduced. The same survey found that only 16% say they feel well prepared for retirement and expect their income to last as long as they live.

If you haven’t started Social Security retirement benefits yet, work with a financial planner, or take a workshop (try local senior centers, universities, or libraries) to help you understand your best age to start Social Security benefits. While the earliest age to qualify for benefits is still 62, Social Security benefits can be reduced by as much as 30%-35% if you claim benefits at that age. And while you can work and receive benefits at the same time, your earnings in the years prior to attaining your full retirement age are restricted ($21,240 in 2023). Earn more than the restricted amount and the Social Security Administration will withhold $1 in benefits for every $2 in earnings.

When you delay the start of Social Security benefits until your full retirement age you can work and earn as much as you want to and receive benefits. Your benefits will not be reduced due to excess earnings, but a portion of benefits could be taxable if your income is over certain income thresholds (more below).

By delaying your benefits past full retirement age, the full benefit amount will grow by 8% per year until age 70. For many, delaying benefits as long as possible, can add thousands of dollars more to lifetime Social Security income.

Clueless about the taxation rules for Social Security. Yes, Social Security benefits can be taxable — up to 85% of benefits can be taxed when income is over the income thresholds. To determine what portion of your Social Security benefits will be added to your taxable income, the IRS requires that you add your:

Adjusted Gross Income (AGI)

+ nontaxable interest

+ half of your Social Security benefits

= Your “combined income”

  • If you file a federal tax return as an "individual" and your combined income* is:

- between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.

- more than $34,000, up to 85% of your benefits may be taxable.

  • If you file a joint return, and you and your spouse have a combined income that’s:

- between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits.

- more than $44,000, up to 85% of your benefits may be taxable.

To help you determine what portion of your benefits are taxable, the IRS has an online tool:

Underestimating your financial risk due to declining health as you age. As older adults age, many are just one new health dianosis away from financial disaster. Both retired and disabled adults spend a very significant portion of their incomes on healthcare costs. TSCL’s Senior Survey found that over half, 53% of our survey participants, spent at least 16% of their household budget on healthcare and the same survey found that nearly one out of five spent 30% or more of their household budget on healthcare. Yet sixty-two percent of participants in the same survey reported that their Social Security benefit is less than $1,829.00 per month in 2023.

One of the most important tools for reducing spending on Medicare deductibles and high out-of-pocket costs is to learn what your health and drug plan options are during the Medicare Open Enrollment period which is going on now through December 7. Free trusted, one on one counseling is available from local State Health Insurance Program (SHIP) counsellors to help you compare what you have now with other plans that might have better coverage at a lower price than what you would pay in 2024 if you stay put in the same coverage that you have now.