I received an interesting question from an individual investor during one of my recent Social Security presentations.
The woman, a client who attended a financial planning firm's retirement symposium where I was speaking in McLean, Va., wanted to know why her Social Security benefit had declined this year.
Was she younger than her full retirement age and still working? I asked.
No, she replied.
Hmm. That's odd, I thought. The earnings cap limitation that can reduce Social Security benefits only applies to earnings from a job. Then a light bulb went off.
Had she had an increase in income recently?
Yes, she said. She had sold her vacation home two years ago.
Bingo! I realized that her Social Security benefit hadn't declined, but her Medicare Part B premium, which is deducted from her Social Security benefits, had increased, leaving her with a smaller net amount.
Why did her Medicare premium increase? Most retirees pay $104.90 per month for Medicare Part B, which covers doctors' visits and outpatient services.
But higher-income retirees pay more. When modified adjusted gross income — which includes all income on your tax return plus any tax-free interest — exceeds $85,000 per year for single individuals or $170,000 for married couples filing jointly, monthly Medicare premiums increase.
The income is based on your latest tax return. So your 2012 tax return filed in 2013 is the basis for the Medicare premiums you pay in 2014.
There are four Medicare premium brackets with surcharges ranging from $40 to $230.80 per month on top of the standard $104.90 per month premium. These are cliff brackets, so if you go over the limit by just $1, you are going to pay the higher premium. These brackets are not adjusted for inflation, meaning more retirees could drift into the higher premium brackets each year.
And those additional premiums are per person, so a high-income married couple could pay more than $670 per month just for Medicare Part B premiums, plus monthly supplemental Medigap insurance premiums that cover Medicare deductibles and co-payments, and a Medicare Part D prescription drug plan. Together those costs can add up to a huge annual health care expense.
Health care costs in general, and means-tested Medicare premiums, are going to become an increasingly important part of retirement income planning. A handful of investment products aren't counted as income by Medicare — giving advisers an opportunity to shift some of their clients' assets into investment vehicles that won't boost their premiums. They include distributions from health savings accounts and Roth IRAs and Roth 401(k) plans; proceeds from a reverse mortgage; income and loans from cash-value life insurance; and certain distributions from annuities in nonqualified accounts.
To learn more, make sure you read my cover story:
Medicare, the Next Frontier, in this week's edition of
InvestmentNews.
(Questions about Social Security? Find the answers in my new e-book.)
