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The Future of Social Security

As politicians debate the future of Social Security, comprehensive financial planning will become increasingly important for those seeking a secure retirement.

Social Security has long been a dependable source of retirement income for millions of Americans. Yet shifting demographics, economic challenges, and the aftershocks of the COVID-19 pandemic have raised concerns about the sustainability of the program.

In fact, the latest projections show that Social Security Trust Fund reserves are likely to run out by 2033—one year sooner than previously estimated. Unless Congress takes steps to shore up the program, beneficiaries will likely see a reduction in benefits.  

In this blog post, we’ll explore the factors contributing to a potential Social Security shortfall, as well as the financial planning strategies you can leverage to help secure your retirement.

How Social Security Works

In the United States, Social Security is a federal government program that provides retirement, disability, and survivor benefits to eligible individuals.

Employers and employees pay into the system through payroll taxes. Currently, employees contribute 6.2% of their income, and employers pay an additional 6.2% for each employee.

Meanwhile, self-employed individuals pay the entire 12.4% payroll tax. In 2023, payroll taxes apply to up to $160,200 of a taxpayer’s annual income.

Contributions go into a Social Security Trust Fund, which is used to pay benefits to current recipients. Consequently, when it comes to the future of Social Security, there’s no guarantee that the money you contribute will be available when you retire.

The Future of Social Security

Why the Future of Social Security Is in Jeopardy

Although the Social Security Trust Fund had an annual surplus of $10.9 billion in 2020, it ran a deficit of $56.3 billion and $22.1 billion in 2021 and 2022, respectively. The future of Social Security is now uncertain, largely due to a combination of demographic changes and economic factors.

First, the birthrate has fallen in recent decades amid a wave of retirements among Baby Boomers, the largest generation of workers in American history. That means there are more beneficiaries but fewer workers paying into the system to fund Social Security benefits.

To put this in perspective, there were 5.1 workers per Social Security beneficiary in 1960. Today, that ratio has fallen to 2.8 workers per beneficiary, and estimates suggest it will decline to 2.1 workers per beneficiary by 2040.

Meanwhile, the average life expectancy for Americans has increased over time.

When Social Security began in 1935, workers who started collecting benefits at age 65 were only expected to live another 12.5 years. By 2030, these projections rise to 21.6 years for women and 19.2 years for men.

Thus, not only are there more beneficiaries than workers today, but beneficiaries are collecting benefits for a longer period, on average.

More recently, the Covid-19 pandemic helped put the future of Social Security in jeopardy by prompting millions of workers to quit their jobs or forcing them into early retirement, resulting in a sharp decline in payroll taxes. An economic slowdown, persistent inflation, and weaker productivity growth have only exacerbated the issue.

How the Future of Social Security Affects Retirees

Unless Congress takes steps to shore up the program, beneficiaries will soon see their benefits decrease.

Current projections indicate that the Old-Age and Survivors Insurance (OASI) fund will be able to cover scheduled benefits in full until 2033. At that point, the program will only be able to fund 77% of scheduled benefits.  

Social Security beneficiaries may also see reduced cost-of-living adjustments (COLAs), which help maintain the purchasing power of Social Security benefits against inflation. For example, the cost of Social Security increased by 8.7% this year to account for rising inflation, according to the Wall Street Journal.

Lastly, various members of Congress have proposed raising Social Security’s full retirement age, changing the way benefits are calculated, and raising taxes to help cover the shortfall. No matter what Congress decides, the future of Social Security is likely to look markedly different than it does today.

Preparing for a Potential Social Security Shortfall

Ultimately, the future of Social Security depends on Congress’s ability to agree on a course of action. Given the potential political implications, it seems unlikely that either party would let the fund dry up altogether.

Still, waiting on Congress to shore up Social Security may not be wise, especially if you’re nearing retirement age. Instead, you may want to consider the following financial planning strategies, which can help you offset the risk of a potential reduction in benefits.

First, be sure to diversify your sources of retirement income. If you can, aim to max out your contributions to your employer-sponsored retirement plan and/or individual retirement account (IRA).

In 2023, individuals can contribute up to $22,500 to a 401(k), 403(b), and most 457 plans ($30,000 if you’re age 50 or older). You can also contribute up to $6,500 to a Roth or Traditional IRA ($7,500 for those 50 and older).

Even if you can’t contribute up to these limits, boosting your retirement savings can help you retire comfortably no matter the future of Social Security. Indeed, adding to your qualified retirement accounts each month can yield meaningful results over time—especially if you invest wisely.

Qualified retirement accounts offer certain tax advantages that allow you to grow your funds tax-free until you withdraw them in retirement. This benefit amplifies the power of compounding, which can boost your savings long-term.

If you don’t plan to retire in the near term, make sure you’re investing in stocks and other growth-oriented investments, so your retirement funds outpace inflation. On the other hand, if retirement is quickly approaching, make sure your asset allocation reflects your time horizon and risk tolerance.

Lastly, if you’re already retired, consider investing in bonds and/or dividend-paying stocks to offset a potential reduction in Social Security benefits. While these types of investments aren’t risk-free, they can still be meaningful and potentially tax-efficient sources of income in retirement.

Social Security Alternatives: Roth vs. Traditional IRA

Satori Wealth Management Can Help You Retire Confidently and Securely

While the future of Social Security is uncertain—and may be for some time—you can still achieve a financially secure retirement with proper financial planning. An experienced financial advisor like Satori Wealth Management can help you identify and implement strategies to preserve and grow your money over time, so you don’t outlive your financial resources in retirement.

To see if we may be the right fit for your financial planning needs, schedule your free RetireNow™ Checkup today. We look forward to hearing from you!

IRMAA: The Sneaky Surcharge That Makes Medicare More Expensive

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. 

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.

Will I Avoid IRMAA Surcharges?

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.  

5 Powerful Questions to Ask Before a Roth Conversion

A Roth conversion can be a powerful tax planning strategy leading up to and in retirement—especially if you exceed the income threshold for contributing directly to a Roth IRA. Indeed, the benefits of a Roth conversion include tax-free distributions in retirement and the elimination of required minimum distributions (RMDs).

Yet Roth conversions don’t make sense for everyone. Thus, it’s important to weigh the costs against the potential benefits, as well as alternative tax planning strategies, before moving forward.

A Roth conversion allows you to convert all or part of your existing traditional IRA funds to a Roth IRA regardless of your income level.

What Is a Roth Conversion?

The IRS allows individuals—regardless of income—to convert a traditional IRA to a Roth IRA. A Roth conversion shifts your tax liability to the present, so you avoid paying taxes on withdrawals in the future.

Here’s how it works:

  • With a Roth conversion, you pay taxes on the amount you convert at your current ordinary income tax rate.
  • After you convert your traditional IRA to a Roth, any withdrawals you make in retirement will be tax-free if you’re over age 59 ½ and satisfy the five-year rule.
  • Since Roth IRAs don’t have RMDs, you can leave your funds to grow tax-free until you need them.

A Roth conversion can be particularly valuable in years when your income is below average, and you fall into a lower tax bracket. Nevertheless, there are a variety of factors to consider before converting your traditional retirement account funds to a Roth.

5 Questions to Ask Yourself Before a Roth Conversion

Here are 5 questions to ask yourself if you’re considering a Roth conversion:

#1: Is a Roth conversion a smart tax move right now?

In general, a Roth conversion makes sense if you expect your tax rate to be higher in the future than it is today. Thus, the most important question to ask yourself before a Roth conversion is, “Will paying taxes on the funds I convert today save me money in the long run?”

Of course, tax laws can change, and it’s impossible to predict the future. That’s why many people choose to take advantage of this strategy in years when their income is below average.

For example, if both you and your spouse work full-time, earn high incomes, and file a joint tax return, you may be in the highest tax bracket most years. But perhaps your spouse loses a large client, cutting their income in half for the year and lowering your joint income enough to temporarily put you in a lower tax bracket. In this case, a full or partial Roth conversion might make sense since your tax rate is lower than normal.

Alternatively, a Roth conversion may also be a smart tax move in years when the market is down. In most cases, your account balance will also drop alongside the market, reducing the dollar amount you convert. As a result, you’ll likely pay less in taxes than you would have before the market dropped.

While the concept of a Roth conversion may be relatively straightforward, the math can be complex. Be sure to work with a financial planner or tax expert, who can advise you on the best time to implement this strategy.

#2: How will a Roth conversion affect other aspects of my financial plan?

Depending on the amount of money you convert to a Roth IRA, your taxable income can increase substantially in the year you execute the conversion. Thus, it’s important to understand how a potential increase in taxable income may impact other areas of your finances—especially if you’re already in retirement.

For example, if you receive Social Security benefits, an increase in taxable income may trigger federal income taxes on your benefits. Currently, single filers earning more than $25,000 annually and joint filers earning more than $32,000 must pay federal income taxes on a portion of their benefits. Therefore, it’s important to know if a Roth conversion will push you over these thresholds.

In addition, an increase in your taxable income can impact your health insurance premiums if you’re in retirement.

For those who retire before age 65 and need to bridge the gap until you’re eligible for Medicare, an income boost may disqualify you from receiving The Premium Tax Credit. This credit helps subsidize the premiums lower earners pay on insurance through the Marketplace.

Similarly, retirees over age 65 may be subject to IRMAA, a surcharge you must pay in addition to your Medicare Part B and D Premiums if your income is over a certain amount.

#3: Do I have adequate tax diversification?

When planning for retirement, it’s often helpful to diversify your financial resources among various account types, including traditional (pre-tax) retirement accounts, Roth (after-tax) accounts, and taxable accounts. This can help you optimize your retirement income strategy and minimize your lifetime tax bill.

As a rule of thumb, it’s usually beneficial to have roughly a third of your assets in each type of account. So, if the majority of your assets are in pre-tax retirement accounts, a partial Roth conversion can help diversify your tax exposure.

On the other hand, converting all of your funds to a Roth IRA may push you too far in the opposite direction. While this isn’t necessarily problematic, it’s a good idea to work with a financial planner to determine your optimal mix of account types.

#4: Do I plan to transfer assets to the next generation?

One of the primary benefits of a Roth conversion is the elimination of required minimum distributions (RMDs). RMDs can increase your taxable income—even in years you don’t need them—and lower your retirement account balance over time.

Suppose you plan to leave your remaining assets to your children upon your death, for example. If most of your retirement funds are in a traditional IRA, you’ll have to take RMDs every year once you reach the applicable age (currently 73), gradually reducing its balance over time.

Even if you don’t spend your distributions, you’ll pay ordinary income taxes on them, lowering the amount you can leave your children. Plus, they’ll have to take taxable RMDs from the inherited IRA.

On the other hand, Roth IRAs don’t have RMDs. If you don’t need the income in retirement, you can let your funds appreciate tax-free within a Roth IRA, then transfer a potentially larger balance to your children upon your death. Moreover, your children can take tax-free withdrawals from the account upon inheriting it in most cases.

#5: Do I have enough cash on hand to pay taxes on the Roth conversion?

Finally, don’t forget you must pay ordinary income taxes on the amount you convert to a Roth IRA in the tax year you make the conversion. Thus, you’ll need to have enough cash on hand to pay your tax bill.

While you can pay the taxes with funds from your retirement account, most experts advise against this approach. That’s because withdrawing money from a tax-advantaged account can negate many of the tax benefits of doing the Roth conversion in the first place.

Meanwhile, if you liquidate funds from investments within a taxable account, you may end up triggering capital gains taxes. This can also diminish the benefits of converting to a Roth IRA.

Ideally, you’ll have enough cash available to avoid disrupting your investment accounts. If not, you may want to start raising cash in anticipation of a future Roth conversion.

Factors to Consider Before a Roth Conversion

Satori Wealth Management Can Help You Determine if a Roth Conversion Is Right for You

A Roth conversion can be a valuable tax and estate planning strategy. Yet due to its complexities, it may not right for everyone. Be sure to consult an experienced financial planner or tax expert to determine if this strategy makes sense for you.

Satori Wealth Management specializes in the financial planning needs of those nearing and in retirement. We can help you develop a retirement plan that considers your personal tax situation and helps you achieve your financial goals. Please schedule your complimentary RetireNow Checkup™ to see if we may be a good fit.