FINANCIAL PLANNING. Social Security Retirement Benefit Claiming Parameters. Effect of Delayed Claiming

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1 FINANCIAL PLANNING FOR THE NON-RETIREE Professor Richard L. Kaplan University of Illinois College of Law Indiana Tax Institute Conference Indianapolis, IN December 12, 2013 Social Security Retirement Benefit Claiming Parameters Each year after full retirement age (FRA) increases the retirement benefit by 8%. This increase is calibrated by months, so partial years count. This increase stops at age 70. Maximum increase is 32% (4 years 8%). Note: Surviving spouse is entitled to retired worker s benefit if higher than her own work-record benefit. Effect of Delayed Claiming Example: Adam plans to retire when his wife turns 65. By that time, Adam will be 68 years and 3 months old. His Social Security retirement benefit at age 66 would have been $1,000. Accordingly, earns a delayed retirement credit of 2¼ years 8% = 18%, or $180 ($1,000 18%). His retirement benefit, therefore is $1,180 ($1,000 + $180). 1

2 Effect of Post-FRA Earnings - I No retirement earnings cutback of benefits after reaching FRA. In the year of reaching FRA, benefits are reduced by $1 for every $3 or monthly earnings over $3,450 (in 2014), computed until FRA. Might boost the Average Indexed Monthly Earnings Replace years with low or no earnings Effect of Post-FRA Earnings - II But the bottom-weighted Primary Insurance Amount formula moderates this impact. Bend-points are set in year the person reaches age 62 32% bracket starts (in 2014) at $816 15% bracket starts at $4,917 Income taxation on up to 85% of benefits Still owe FICA tax on earnings Benefit Claiming Do-over File Social Security Form 521, Request for Withdrawal of Application, within 12 months of first claiming and repay all benefits received including spousal benefits paid on the person s account. Claimant must have reached FRA. No interest charged. Can be done only once. 2

3 Medicare Part A Coverage Hospital stays up to 60 days each, with a per-admission deductible of $1,216 (in 2014) Skilled nursing home stays up to 100 days, with a per-day deductible of $152 after the 20th day Home health care visits up to 28 hours per week, pursuant to a care plan reviewed by a physician every 2 months Hospice care up to 180 days Medicare Part A Costs Prepaid via FICA on all wages, salaries, and net earnings from self-employment Eligibility requires: (1) age 65 and (2) entitlement to Social Security retirement benefits (i.e., 40 quarters of coverage ) Spousal eligibility Otherwise: must have been U.S. citizen or resident at least 5 years: $426 per month (in 2014) + must enroll in Part B Medicare Part B Coverage Doctors fees: 80% of Medicare s approved charge Out-patient diagnostic laboratory tests Ambulance services Durable medical equipment Initial preventive physical examination in the first year of coverage; annual wellness visits thereafter 3

4 Medicare Part B Costs Monthly premium: $ (in 2014) Surcharges for higher-income enrollees 20% of approved charges for doctors fees Up to an additional 15% if the physician is not a participating provider Annual deductible: $147 (in 2014) No annual cap need for supplementation Part B Delayed Enrollment Permanent increase of 10% for each year of delayed enrollment Example: Betty delayed enrolling in Part B for 55 months. There are four 12-month periods in 55 months, so her premium is 40% (4 years 10%). Exception: no penalty applies if Betty was covered by a large employer ( 20 employees) group health plan for employees (and their spouses), not retirees. Part B Premium Surcharges Income (if Single) $85,000 or less $85,001 - $107,000 $107,001 - $160,000 $160,001 - $214,000 Over $214,000 Monthly Payment $ $ $ $ $

5 Medigap Insurance Covers most Part A and B deductibles and co-payment obligations 11 different but standardized packages Cost varies by insurer as does availability Cannot be declined for medical reasons during the first 6 months of Part B enrollment Medicare Part D Coverage Prescription drugs Generic vs. brand-name Restricted formularies Dosage amounts and frequency Cost varies by plan; surcharge for higherincome enrollees Annual deductible, co-insurance, and coverage gap ( donut hole ) vary by plan Part D Premium Surcharges Income (if Single) Percent of National Basic Premium $85,000 or less none $85,001 - $107, % $107,001 - $160, % $160,001 - $214, % Over $214, % 5

6 Standard Coverage Package Annual deductible: $310 (in 2014) First coverage tier: annual drugs costs up to $2,850 $, (i.e., next $2,540) $, 25% co-pay py Coverage Gap : annual drug costs up to $6,455 (i.e., next $3,605). Catastrophic Tier : annual drug costs over $6,455 5% co-pay. Though specific plans can vary their design, 66% have a coverage gap. 6

7 Part D Delayed Enrollment Penalty is 1% for each month of delayed enrollment and is a permanent addition. Example: Charlie does not enroll in a Part D plan until he is 67 years and 5 months old. This delay period (from age 65) is 29 months, so his penalty is 29% of the national average monthly premium. No penalty applies if the person had creditable coverage. Medicare Part C Managed care arrangements: HMO (health maintenance organizations); PPO (preferred provider organizations) Few deductibles or co-payments; no need for supplementation Usually cover prescription drugs and some wellness benefits Cost varies with plans, where available Retirement Accounts - I Required Minimum Distributions (RMD) must begin when the account-owner reaches age 70½, unless that person is still working for that employer. In that case, RMDs are deferred until the person stops working. This exception applies only to employedsponsored retirement plans, and not IRAs. This exception is not available to anyone who owns more than 5% of the employer. 7

8 Retirement Accounts - II This exception does not apply to plans created at former employers unless those accounts are rolled into the current employer s plan. Such rollovers facilitate simplification of the holder s financial life and better coordination of investment strategies. Rollovers depend upon whether the current employer s plan will accept them. 8