By Ilana Polyak | December 28, 2020 at 07:14 AM | The original version of this story was published on BenefitsPRO
Also, check out three strategies for clients who must take
benefits before their full retirement age.
By any measure, 2020 has been an
extraordinary year, what with a pandemic, sputtering economy and other news. By
these standards, the changes to Social Security are
far less dramatic and won’t cause major disturbances.
Still, it’s important to be aware of
them, seeing as how for the average wage earner, Social Security makes up some
40% of their pre-retirement come.
Each year, the Social Security Administration adjusts
the amounts of benefits
retirees receive, how much income is taxable for Social Security
purposes and how much beneficiaries can earn before having some of their
benefit withheld.
1. Higher benefit
amounts
Social Security benefits will rise by
1.3% in 2021. For the average Social Security recipient, that equals an
additional $20 a month, taking their checks from $1,523 to $1,543.
While any increase is certainly
welcome, it may not go that far, note Social Security experts.
The Social Security COLA increase is
based on the Consumer Price Index for Urban Wage Earners and Clerical Workers,
known as CPI-W from the fourth quarter of 2019 to the third quarter of 2020.
That index includes some categories
of the goods and services that went up significantly more than 1.3%. Take food,
for example.
The Bureau of Labor Statistics
reports that food prices increased 3.6% from November 2019 to this November;
utilities went up 4.4% during that time period. Energy prices, however,
declined nearly 10%.
“Energy was down and that skewed
everything,” says Elaine Floyd, author of “Savvy Social Security Planning for
Boomers,” and director of retirement and life planning at Horsesmouth, which
helps advisors’ business building.
“But seniors don’t spend that much on
things like transportation. In general, it’s typical for the COLA to not cover
the things that seniors spend their money on,” Floyd explains.
Another category that rises higher
than inflation is health care, and retirees are big consumers of that. Medicare
Part B, the portion of the health insurance plan for retirees that covers
outpatient care, medical equipment and other medical services, will rise by 6%,
from $144.60 to $153.30 a month.
“Over the long term Medicare will
consume a bigger and bigger portion of a person’s Social Security check,” says
CFP Mark Orr of Retirement Wealth Advisors in Alpharetta, Georgia, and author
of “Social Security Income Planning: Baby Boomer’s 2020 Guide to Maximize Your
Retirement Benefits.”
2. More earnings
subject to Social Security taxation
For 2021, taxpayers will pay 6.2%
Social Security tax and a 1.45% tax for Medicare (known together as FICA) on
the first $142,800 they earn, up from $137,700 in 2020.
There will be no FICA tax owed on any
earnings above $142,800. (The yearly increase in earnings is based on the national
average wage index.)
“Wages tend to go up faster than
inflation, so the earnings threshold usually goes up more than the COLA
increases,” Floyd explains.
President-elect Joe Biden has
proposed taxing incomes over $400,000 for Social Security and Medicare as a way
to bring in additional funds and shore up both systems.
The SSA says that both Social
Security and Medicare face long-term financial shortfalls and estimates that
trust funds of both will be depleted within a decade.
If passed, Biden’s proposal
would create a “donut hole,”
between $142,800 and $400,000 where no FICA tax would apply. “Over time, that
donut hole will close as more income is taxed,” says Floyd. “But that will take
decades.”
Of course, it all depends on which
party controls the U.S. Senate in 2021.
3. Earnings limit
will be higher.
In 2021, beneficiaries who are
collecting Social Security prior to reaching their full retirement age and
continue to work will have any income they earn over $18,960 taxed, an increase
of $720 from 2020.
One benefit dollar of every $2 they
earn above that limit will be withheld.
In the year that beneficiaries reach
their full retirement age (FRA), however, the earnings limit goes up to $50,520
(from $48,600). Plus, only $1 out of every $3 above that amount will be
withheld.
According to the SSA, from
the month individuals reach their FRA, their earnings no longer reduce their
benefits, no matter how much they earn. ”We will recalculate your benefit
amount to give you credit for the months we reduced or withheld benefits due to
your excess earnings,” it states.
Once beneficiaries reach full
retirement age, their checks will be recalculated to include the withheld
amounts. They should receive more per month than they had been getting.
3 Social Security
strategies to consider
Coronavirus has dealt a blow to the
U.S. economy, causing numerous job losses. For those nearing retirement, Social
Security may seem like a good source of income.
But taking the benefit prior to full
retirement age can mean an income reduction that’s locked in. If you’re working
with someone who’s been forced into early retirement, consider these
strategies:
Let the highest benefit accumulate. Married
couples have options when it comes to retirement. If both partners are over 62
and have been laid off in the past year, consider tapping only the lowest of
the two benefits.
“You should put off taking the higher
Social Security check for as long as possible”, says Orr. “That’s a guaranteed
check that will get COLA increase.”
Repay Social Security. Some people
who were laid off and started taking Social Security may have found new jobs.
They have some options, says Elaine Floyd of Horsesmouth.
“If you go back to work and it’s been
less than 12 months, they can withdraw their application, repay your benefit
and continue to delay for a higher benefit,” she says.
Wait until FRA. Those who
don’t find new jobs within 12 months have options too, Floyd notes. They can
wait until full retirement age and suspend at that point, which will result in
a higher eventual benefit.
Roth conversions look more
attractive. With higher taxes likely in the future, Orr argues Roth conversions
make more sense. It allows high earners to pay taxes on their income at
today’s lower rates in order to avoid taxes on withdrawals later on when rates
might be higher.
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