Social Security and Medicare Changes in 2020
By Joe Globensky, RFC®
We’ve all seen the reports on the number of Baby Boomers turning 65 every day. 10,000! That’s right. Every day there are 10,000 new 65-year olds. So it’s important for those of you in this category to understand the Social Security and Medicare changes that occur in the new year. Let’s start by looking at the changes to Social Security.
Social Security Changes in 2020
Full Retirement Age (FRA) is Increasing
In 2020, the FRA will increase by two months to 66 years and 8 months for persons born in 1958. For those individuals that want 100% of their social security benefit, they will have to wait until they are 66 years and 8 months old. If they begin taking their benefit at any time between age 62 and 66 and 7 months, they will face a permanent reduction to their monthly payout.
Small Cost of Living Adjustment (COLA)
While low inflation is a good thing for consumers, it also means that the annual adjustment to social security benefits will be low as well. In 2020, the COLA for Social Security benefits will be 1.6%. For the average retiree, this means a monthly payout increase of about $24. And the highest earners could come closer to $50 more per month in Social Security retirement benefits.
Maximum Social Security Benefits Will Increase
Social Security benefits are capped at a certain level. This is based on your lifetime earnings. In 2019, no retired worker at FRA could take home more than $2,861 per month. In 2020, this amount is increasing. According to the Social Security Administration (SSA), the maximum monthly benefit at full retirement age will increase by $150 per month to $3,011.
Upper-Income Workers Will Pay More
The Social Security payroll tax is set at 12.4%. For 2019, that was assessed on the first $132,900 of income. In 2020, it will be assessed on earned income up to $137,700. If you are self-employed and responsible for the full payroll tax, you will owe up to $595.20 extra in 2020. If you are employed by someone else, and split the payroll tax with your employer, you’ll owe up to $297.60 extra in 2020.
Retirement Earnings Thresholds Increase
If you choose to receive your Social Security benefits before your FRA, the retirement earnings test can be a major thorn in your side if you continue to work and generate income. The retirement earnings test allows the SSA to withhold some, or all, of your benefits if you’ve started your benefits before FRA, are still working, and surpass certain income thresholds.
In 2020, you’re allowed to earn $18,240 ($1,520 per month) without any withholding. This is an increase of $50 a month over 2019. But if you surpass $18,240, the SSA can withhold $1 in benefits for every $2 in earned income above this threshold. If you hit FRA in 2020, you’re allowed to earn $48,600 ($4,050 per month) before any withholding would start. That’s up $140 per month from 2019. Also, this withholding would only be $1 for every $3 in earned income above the threshold.
Note: The earnings test no longer applies once you have reached your FRA, regardless of when you started your benefits. And, any withheld benefits are returned in the form of a higher monthly payout after hitting your FRA.
Some of these changes were designed to strengthen Social Security’s future. But you should create a plan to incorporate your Social Security benefits as one component of your future retirement income. And the longer you have to plan, the more options you will have at retirement.
Now let’s discuss some of the major changes to Medicare for 2020.
Medicare Changes in 2020
Medicare Part B Premiums and Deductibles are Rising
We all know about rising healthcare costs so this should come as no surprise. What might surprise you is the amount of the increase. For most people, in 2019, Medicare Part B costs $135.50 a month. In 2020, that will increase to $144.60. The annual deductible for all Medicare Part B beneficiaries is $198 in 2020, an increase of $13 from the annual deductible of $185 in 2019.
Some Medicare Supplement Plans Will No Longer Be Available
Medicare Supplement Plans C, F, and High-Deductible F will not be offered to anyone who was not eligible for Medicare before January 1, 2020. These plans are being restricted because they cover the Medicare Part B deductible.
The good news is that if you enrolled in Medicare Part A by December 31, 2019, and have one of the plans no longer offered, you can keep it. You can even apply for those plans in the future if you were eligible by the cut-off date.
Inflation Adjustments for the Medicare High-Income Brackets
Medicare beneficiaries with high incomes pay more for Part B and Part D. These income brackets were first introduced in 2007 and 2011, respectively. In 2020, for the first time, the income brackets will be adjusted for inflation. The first bracket will now start at $87,000 for a single person and $174,000 for a married couple, up from $85,000 and $170,000, respectively, in 2019.
As healthcare costs continue to rise, its key to have strategies in place so they won’t harm your overall financial picture. Finding ways to save on prescription drug costs, evaluating your existing healthcare coverage, and incorporating wellness activities into your lifestyle, are just a few of the ideas that may help.
If you need help in understanding how these Social Security and Medicare changes may affect you, please call us at (217) 605-8130. At Connections Financial Advisors, we want to help educate you on the changing financial landscape, and make sure you are prepared for your future.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
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