Posts

Avoid These 8 Mistakes to Maximize Your Social Security Benefits

Social Security is an important source of income for many retirees. Unfortunately, it’s all too easy to make mistakes that significantly reduce your benefits. In fact, only 15% of Americans preparing for retirement strongly agree that they know how to maximize their Social Security benefits, according to a 2022 report from the Nationwide Retirement Institute.

The good news is many of these mistakes are avoidable once you’re aware of them. In this blog article, we’ll explore eight common mistakes people make when claiming Social Security benefits and how to avoid them, so you can maximize your income in retirement.

To maximize your Social Security benefits, avoid these eight potentially costly mistakes:

Mistake #1: Claiming Your Benefits at the Wrong Time

The age at which you claim Social Security benefits can significantly affect the amount of retirement income that you receive. By understanding the impact of claiming Social Security benefits at different ages, you can make an informed decision about when to claim benefits based on your financial needs and goals.

Your full retirement age (FRA) is the age at which you’re entitled to receive your full Social Security benefit amount based on your earnings history. For those born in 1960 or later, your FRA is 67.

To maximize your Social Security benefits, it’s best to claim them after you reach your FRA—if you can.

If you claim them sooner, your benefits will be permanently reduced by up to 30% depending on your age. On the other hand, if you delay claiming Social Security benefits beyond your FRA, your benefit amount will increase by 8% per year, up to age 70.

Before claiming your Social Security benefits, be sure to consider factors such as your other sources of retirement income and projected expenses. You can also use the Social Security Administration’s Retirement Estimator to help you determine the optimal time to start taking benefits.

Mistake #2: Not Maximizing Your Spousal Social Security Benefits

Spousal benefits can be especially beneficial for couples with a significant difference in earnings history. That’s because the lower-earning spouse can receive a higher benefit amount based on the higher-earning spouse’s earnings history.

Your spousal benefits amount is generally equal to 50% of your spouse’s FRA benefit amount. For example, if your spouse’s FRA benefit amount is $2,000 per month, you could be eligible to receive up to $1,000 per month in spousal benefits.

To maximize your Social Security benefits, first be sure to understand the eligibility requirements for spousal benefits.

Specifically, you must be at least 62 years old and have been married at least one year to be eligible. If you’re divorced, you must have been married for at least ten years and not have remarried before age 60.

In addition, be careful not to claim your spousal benefits too early. If you claim them before your FRA, your benefit amount will be permanently reduced.

Also, keep in mind if you’re eligible for your own Social Security benefits based on your own earnings history, you’ll receive the higher of your own benefit amount or the spousal benefit amount.

Maximize Your Social Security Spousal Benefits

Mistake #3: Ignoring the Impact of Taxes on Your Social Security Benefits

Depending on your income level, up to 85% of your Social Security benefits may be subject to federal income taxes. To maximize your Social Security benefits, make sure you’re aware of these income thresholds.

The IRS uses your “combined income” to determine how your benefits are taxed. You can calculate your combined income by starting with your adjusted gross income (AGI) and adding back nontaxable interest, as well as half your Social Security benefits amount in a given tax year.

In 2023, single taxpayers with combined income between $25,000 and $34,000 may have to pay federal income taxes on up to 50% of your benefits. If your combined income exceeds $34,000, up to 85% of your benefits amount may be taxable.

These same percentages apply to joint taxpayers with combined income above $32,000 and $44,000, respectively.

Mistake #4: Ignoring the Earnings Test

If you start taking Social Security benefits before your FRA and continue to work, your benefits may be reduced if you earn more than a certain amount. In 2023, for example, your benefits will be reduced by $1 for every $2 you earn over $21,240—if you start taking benefits before your FRA.

To maximize your Social Security benefits while you’re still working, try to avoid claiming your benefits until you reach your FRA. Once you reach your FRA plus one month, your earnings no longer reduce your benefits, even if you earn more than the annual limit.

Alternatively, you may want to cut back your work hours to stay below the earnings limit. A financial planner can help you determine the best strategy to maximize your Social Security benefits.

Mistake #5: Not Considering How Divorce Affects Your Social Security Benefits

If you’re divorced, you may be entitled to claim Social Security benefits based on your ex-spouse’s earnings history. In general, those who meet the following criteria can receive a divorced spouse benefit equal to 50% of your ex-spouse’s FRA benefit amount:

Your ex-spouse is entitled to Social Security retirement benefits.
You were married for at least 10 years.
You’re at least 62 years old.
You’re currently unmarried (unless your ex-spouse has remarried).

It’s also important to note that your ex-spouse doesn’t need to have claimed their own Social Security benefits for you to claim your divorced spouse benefit.

To maximize your Social Security benefits after divorce, try to avoid claiming your divorced spouse benefit before reaching your FRA. Otherwise, the amount you receive will be permanently reduced.

In addition, if you’re eligible for your own Social Security benefits based on your own earnings history, you will receive the higher of your own benefit amount or the divorced spouse benefit amount.

Maximize Your Social Security Divorced Benefits

Mistake #6: Failing to Consider Survivor Benefits

If you lose your spouse prematurely, you may be eligible for Social Security survivor benefits. As the surviving spouse, you can receive a survivor benefit equal to 100% of your spouse’s benefit amount if you’re at FRA or older.

To maximize your Social Security survivor benefits, first be sure to understand the eligibility requirements. If you’re the surviving spouse, you must meet the following criteria:

Your deceased spouse must have worked long enough and paid enough Social Security taxes to be insured for benefits.
You must be at least 60 years old (or 50 if you have a qualifying disability).

Keep in mind your survivor benefits may be reduced if you claim them before you reach your FRA or are entitled to your own Social Security benefits based on your own earnings history. In addition, survivor benefits may be subject to federal income taxes if your income exceeds certain thresholds.

Maximize Your Social Security Survivor Benefits

Mistake #7: Not Checking Your Earnings Record

If your earnings record is incorrect or incomplete, it can result in a lower benefit amount, potentially costing you thousands of dollars in lost retirement income.

The easiest way to avoid this mistake is to check your earnings record annually to ensure it’s accurate and complete. You can create an account with the Social Security Administration (SSA) to keep an eye on your statement.

If you do find errors on your earnings record, be sure to contact the SSA as soon as possible to correct them. Fixing any inaccuracies before you’re ready to retire can help you maximize your Social Security benefits when it comes time to claim them.

Mistake #8: Not Seeking Guidance from Satori Wealth Management to Maximize Your Social Security Benefits

The decisions you make about when and how to claim your Social Security benefits can have long-term implications for your retirement income and financial security. Fortunately, a comprehensive retirement plan can help you avoid potentially costly mistakes, so you can maximize your Social Security benefits.

Satori Wealth Management can help you navigate the complexities of Social Security, as well as the trade-offs and considerations involved in claiming your benefits. We can also help you explore strategies for maximizing your retirement income while minimizing the impact of taxes.

If you’re ready to begin your retirement planning journey, schedule your Free RetireNow™ Checkup today.

May 8, 2023/by Danny Michael, CFP® RLP® MSBA

The Best Early Retirement Health Insurance Options for Savvy Retirees

Retirement, Insurance

Early Retirement Healthcare Insurance Options

For most Americans, healthcare is one of the largest expenses in retirement—especially for those who retire before age 65. In this article, we’re sharing three early retirement health insurance options that can help you bridge the gap until you’re eligible for Medicare.

The Covid-19 pandemic prompted a wave of early retirements, primarily among Baby Boomers. In fact, more than 3 million Americans retired early because of the Covid-19 crisis, according to research from the St. Louis Fed.

Meanwhile, there’s a growing movement among younger generations to retire early by saving aggressively now.

Unfortunately, Medicare, the federal program that provides health coverage for more than 65 million Americans, doesn’t begin until age 65. If you’re one of the many Americans ready to retire before age 65, you’ll need to have a plan in place to continue your healthcare coverage.

Here are three early retirement health insurance options to consider if you retire before age 65:

#1: Workplace Insurance

Retiring early doesn’t necessarily mean you can’t continue to take advantage of workplace insurance. For example, if your spouse is still working, you may be able to join their employer-sponsored health insurance plan.

Different companies have different rules regarding eligibility and benefits, so you’ll want to confirm this is a viable option. Also, this option may increase your spouse’s healthcare premiums and/or your out-of-pocket healthcare expenses, so be sure to factor the extra costs into your budget when planning for early retirement.

Another early retirement health insurance option is to get a part-time or full-time job post-retirement that offers employee benefits. However, keep in mind you may need to meet certain criteria to qualify, such as completing a probationary work period or committing to working a minimum number of hours each week.

Lastly, some employers offer retiree benefits, including health insurance.

In fact, 21% of large companies that offer health benefits also offer retiree health plans for some employees, according to a recent survey. Some employers may even pay a portion of the monthly premiums. And in some cases, you may be able to keep your retiree benefits after you sign up for Medicare to supplement your coverage.

If available, workplace insurance can be one of the most cost-effective early retirement health insurance options. Not only do you benefit from the economies of scale of a group plan, but you also don’t have to spend time shopping around for coverage.

On the other hand, you may not be eligible for coverage right away, so you still need temporary coverage to bridge the gap.

#2: COBRA/Short-Term Health Insurance

If your insurance gap is less than three years, you may want to consider COBRA or short-term health insurance.

COBRA

The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires employers to offer retirees the option to continue their health benefits for a limited time. If your employer had at least 20 employees on more than 50 percent of its typical business days in the previous calendar year, COBRA may be one of your early retirement health insurance options.

To be eligible for COBRA, you must have enrolled in your employer’s health plan when you were an employee. In addition, the health plan must be active for current employees.

If you’re eligible, you can typically continue your existing healthcare coverage for up to 18 or 36 months after you stop working. Even if you don’t sign up for COBRA yourself, your covered family members may be eligible to continue their benefits.

After you stop working, you’ll receive a COBRA election notice if you qualify. You then have 60 days from your last day of coverage or from when you receive the notice (whichever is later) to continue or decline your healthcare coverage.

COBRA can be a convenient option for some early retirees since it makes it easy for you to continue your existing coverage.

However, it can also be one of the more expensive early retirement health insurance options. On average, the monthly COBRA premium for one person is $400 to $700 per month.

Short-Term Health Insurance

If you’re not eligible for COBRA, another option may be short-term health insurance if you’re within a few years of turning 65. Short-term insurance replaces gaps in coverage for up to one year, but you may be able to extend it for up to three years.

Keep in mind that not all states allow short-term health insurance coverage. In California, for example, lawmakers passed a law in 2018 that prohibits the sale or renewal of short-term health insurance in the state. Plus, eligibility depends on your income and medical history.

Short-term health insurance can be a less expensive early retirement health insurance option than the ACA marketplace if you only need it for a short period. However, it may not be easy to get, and it typically doesn’t provide comprehensive coverage.

#3: ACA Marketplace

For many people who retire early, the Affordable Care Act (ACA) marketplace will be your best bet for temporary, affordable coverage—especially if you have several years until you turn 65 and are eligible for Medicare.

All ACA plans must provide 10 essential health benefits, including preventive care, mental health services, and prescription drug coverage.

The ACA marketplace offers annual open enrollment typically beginning in November and lasting through January. However, the exact dates vary by state.

In addition, certain qualifying life events allow you to sign up for coverage outside of the open enrollment period. For example:

Loss of healthcare coverage
Household changes such as marriage or divorce
Changes in residence

In 2023, the average cost of health insurance on the marketplace for someone who’s 60 years old is $1,025 per month. Less expensive, low coverage plans typically start at around $500 per month.

Thus, the affordability of the ACA marketplace as an early retirement healthcare option depends on what type of plan you select. Options range from high-deductible catastrophic plans to comprehensive coverage.

In addition, you may be able to lower your costs if you’re eligible for the premium tax credit. Generally, only the lowest income Americans qualify for this credit, though.

Additional Early Retirement Health Insurance Options

If you prefer not to use the ACA marketplace, you can also purchase a commercial health insurance policy directly from an insurance company or broker. The main advantage of a commercial policy is that you can select any plan that fits your budget and medical coverage needs.

However, these policies can also be expensive. And unlike the marketplace, the premium tax credit isn’t available.

Finally, while not technically early retirement health insurance options, a health savings account (HSA) and/or membership organization benefits can help lower your healthcare costs in retirement.

If you have an HSA, you can use the funds to pay for qualifying medical expenses if you retire early. Qualifying expenses may include insurance deductibles, co-pays, and coinsurance.

Generally, you can’t use HSA funds to pay for health insurance premiums, unless they fall into one of the following categories:

COBRA
Long-term care insurance
Medicare
Health insurance you receive while collecting unemployment benefits.

HSAs are advantageous because they offer triple-tax savings. Contributions are pre-tax, funds can grow on a tax-deferred basis, and withdrawals are tax-free if you use them for eligible expenses.

On the other hand, you need a qualifying high-deductible health plan to open an HSA. In addition, you’ll still likely need one of the early retirement health insurance options above until you turn 65.

Meanwhile, some membership organizations offer members exclusive benefits such as affordable health insurance coverage and other healthcare discounts. Examples include:

AARP
Alliance for Affordable Services
Freelancers Union

These discounts can help defray the cost of health insurance if you retire early. However, eligibility and coverage can vary by organization, membership status, and state of residence.

Satori Wealth Management Can Help You Evaluate Your Early Retirement Health Insurance Options

Planning for retirement can be overwhelming, especially if you’re going it alone. An experienced financial advisor like Satori Wealth Management can help you achieve your early retirement goals with confidence.

To see if we may be the right fit for your financial planning needs, we invite you to start your Free RetireNow™ Checkup and schedule your first 30-minute meeting. We look forward to meeting you!

April 10, 2023/by Danny Michael, CFP® RLP® MSBA

IRMAA: The Sneaky Surcharge That Makes Medicare More Expensive

Retirement, Retirement Income, Taxes

IRMAA is a sneaky surcharge that can increase your Medicare premiums if your income exceeds a certain threshold in retirement.

When it comes to estimating your future expenses in retirement, one of the biggest unknowns is the cost of healthcare.

According to a 2022 Fidelity report, the average 65-year-old retired couple may need about $315,000 to cover healthcare expenses. However, depending on your lifestyle, how long you live, and a multitude of other factors, your healthcare costs may far exceed this estimate.

Indeed, healthcare tends to be one of the largest–if not the largest–living expense for most retirees. Thus, the last thing you want is for your healthcare costs to unexpectedly rise, especially when you can prevent it.

That’s why it’s important to understand what IRMAA is, as well as the steps you can take to avoid it.

What Is IRMAA?

IRMAA, short for income-related monthly adjustment amount, is a surcharge Medicare beneficiaries must pay each month if their income exceeds a certain threshold.

To determine if you’re subject to IRMAA charges, the Social Security Administration uses your modified adjusted gross income (MAGI) from your tax return two years ago. For example, the 2023 income brackets for IRMAA apply to the adjusted gross income you reported in 2021.

In 2023, the standard Part B monthly premium is $164.90. Those subject to IRMAA may see their Part B premiums increase by as much as $395.60 per month. Furthermore, IRMAA can increase Medicare Part D premiums by as much as $76.40.

Therefore, IRMAA can significantly increase your healthcare expenses if you make too much money. While there are ways to appeal IRMAA if you don’t think it applies to you, the easiest way to avoid it is to keep your retirement income below the threshold.

How Is IRMAA Calculated?

The Social Security Administration uses its own MAGI calculation to determine if you must pay IRMAA. To calculate this number yourself, locate your Adjusted Gross Income (AGI) on your tax return. Then, add the following:

Tax-exempt interest that you’ve earned or accrued (e.g., municipal bond interest).
Interest from U.S. Savings Bonds you used to pay for higher education.
Any income you earned while living abroad that was excluded from your gross income.
Income from Puerto Rico, American Samoa, Guam, and/or Northern Mariana Islands, which is not otherwise included in AGI.

The total amount is your Medicare-specific MAGI. Below are the income brackets for 2023. These income thresholds generally change each year based on the inflation rate.

2023 IRMAA Brackets — Source: Social Security Intelligence

Who Pays the Medicare Surcharge?

If you owe IRMAA, the Social Security Administration will let you know by sending you a letter. Here’s how it works:

When you first enroll in Medicare, you pay the standard Part B and D premiums.
If your income is high enough to trigger IRMAA, the Social Security Administration will send you a pre-determination notice.
If you believe the information that the SSA sends you is inaccurate, you have 10 days to contact them to dispute the notice.
Otherwise, the SSA will send you an initial determination notice within a few weeks of sending the pre-determination notice.

The determination notice has most of the same information as the pre-determination notice but also outlines an appeals process. If you decide to appeal the IRMAA decision, you must file Form SSA-44 and show that either your tax return was out of date or inaccurate or that your income has recently decreased because of a life-changing event. Examples may include:

Death of a spouse
Divorce or annulment
Marriage
Work stoppage or reduction

If you are subject to IRMAA and have your Medicare Part B and D premiums deducted from your Social Security checks, you don’t need to take any action to pay the surcharge. If you pay your premiums separately, you’ll receive a bill to pay IRMAA.

Strategies that Can Help You Avoid IRMAA

Keeping your income below the IRMAA threshold is the easiest way to avoid the Medicare surcharge.

This may be challenging if you need to make a large withdrawal for an unexpected expense or in years when you must take required minimum distributions (RMDs). Fortunately, there are a variety of tax planning strategies that can help lower your Medicare-specific MAGI.

Below are a few examples of strategies that can help you avoid IRMAA.

Give Strategically

Donate cash to a donor-advised fund (DAF). A DAF allows you to make a lump-sum charitable donation and take the deduction in the current tax year. An additional benefit is that you don’t have to decide where your donation goes right away. Instead, you can take your time and direct your donations in the years that follow.
Donate appreciated securities directly to a charity or to a DAF. This strategy allows you to avoid the capital gains taxes you’d otherwise pay if you sold the securities outright. Since capital gains are included in the MAGI calculation, this strategy can help reduce your Medicare-specific income.
Make a Qualified Charitable Distribution (QCD). If you reach RMD age and don’t need the extra income, you can donate your RMD to charity—a tax planning strategy called a qualified charitable distribution (QCD). A QCD allows IRA owners to transfer up to $100,000 directly to charity each year. And since RMDs are included in the MAGI calculation, donating yours can help you avoid triggering the IRMAA surcharge.

Use Down Markets to Your Advantage

Tax-loss harvesting. The IRS allows investors to offset realized capital gains with realized losses from other investments. If you have substantial losses, you may be able to completely offset your gains and potentially lower your taxable income.
Roth conversion. Since account values typically decline in a negative market environment, so does the amount on which you’ll pay taxes when converting part or all of your traditional IRA funds to a Roth. Plus, since Roth IRAs don’t have RMDs, you can reduce your taxable income in future years.

Max Out Tax-Advantaged Accounts If You’re Still Working

Traditional IRA or 401(k). Contributions you make to traditional retirement accounts reduce your taxable income. You can also take advantage of catch-up contributions once you turn 50.
Health savings account (HSA). With an HSA, contributions, capital gains, and withdrawals are all tax-free if you use your funds for eligible healthcare expenses. And like qualified retirement accounts, you can deduct your contributions from your taxable income in most cases.

Satori Wealth Management Can Help

Planning for retirement can feel overwhelming, especially with so many variables and unknowns. The good news is you can minimize unnecessary expenses like IRMAA and make the most of your resources in retirement with a well-defined financial plan.

An experienced financial planner like Satori Wealth Management can help you transition to the next phase of life with confidence. To get started, book your free RetireNow™ Checkup today.

March 15, 2023/by Danny Michael, CFP® RLP® MSBA