Mullooly Asset Management
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Does Claiming Social Security Early Affect Medicare?
Ready for a deep-dive into the complex world of social security benefits and retirement planning? Brace yourselves as Brendan and Casey unravel the nuances of social security, Medicare and more.
We'll be discussing the cost of living adjustment (COLA) - a critical aspect designed to keep up with inflation, and we’ll be comparing the 2024 COLA set at 3.2% with the average COLA of 2.3%. We'll also explore how recent inflationary spikes have prompted individuals to rethink their retirement strategies – a silver lining, perhaps, in these challenging times.
The discussion doesn't end with the COLA update; the guys dive into the trends of people claiming social security benefits early. Curious about how these patterns have evolved? Stick around as we explore how factors like life expectancy, better education about waiting for benefits, and earnings limit influence these decisions.
We'll also illustrate the link between claiming social security benefits and enrolling in Medicare Part A and navigate the tricky waters of healthcare expenses in retirement planning.
In addition, we’ll share some golden nuggets on maintaining a low taxable income, with essential tips on diversifying your savings streams and the strategic use of 401k and brokerage accounts. So come join us for this comprehensive guide on maximizing your social security benefits.
Hello and welcome back to the Mullooly Asset Podcast. I'm your Casey ,Mullooly, , back with you for episode 457. Brendan is joining me at the table this week. Brendan, thanks for hopping on here.
Brendan Mullooly:Yeah, let's do it.
Casey Mullooly:Let's get into it. So we are going to start out by continuing our conversation from last week. Last week, we talked about social security and breaking down when the best time to claim is best in air quotes. We talked about some different scenarios claiming at 62, claiming at full retirement age, at 66 or 67, and claiming and waiting to claim until your age 70. Just this morning, we got some new information about social security, specifically the cost of living adjustment or the COLA. Brendan, why don't you tell us what the COLA is, what it's designed to do and the thought process behind that?
Brendan Mullooly:Yeah, I mean your dollars go further now than they will in the future, and so when you have a benefit social security and retirement one of the best features is that it adjusts for inflation over time, hopefully keeping you up to date in terms of purchasing power with those dollars that are coming in. And it's pretty rare these days to find a pension or guaranteed source of income that does adjust for inflation. So that is one of the biggest benefits of your social security benefits, when you do collect, is that they do adjust for inflation.
Casey Mullooly:The 2024 cost of living adjustment for social security is what was announced today and it is going to be 3.2%. So that's a 3.2% increase in your benefit from last year.
Brendan Mullooly:Returning to trends maybe.
Casey Mullooly:It looks that way. Let's let's recap where it was and what the average Cola is. So the average Cost of living adjustment is 2.3 percent. 2024 is at 3.2 percent higher than the average, but a big step down from last year. 2023's Cola was 8.7 percent and Going back a couple years further, 2022 5.9 percent and 2021 1.3 percent, kind of in line with what we've seen from Just the overall inflation readings as well.
Brendan Mullooly:Yeah, now encouraging to see it coming down. I mean, I guess the shortcoming People will always grumble about the different ways of measuring inflation because we're trying to average things out across goods and services that you know have have completely different rates of Increase, decrease over time in terms of being more expensive, less expensive. So may not feel like everything across the board is just 3.2 percent more expensive than it was 12 months ago, but that's the best approximation that we've got.
Casey Mullooly:So it's good to see it moderating or headed back towards the Historical average right, you like seeing more money in your monthly check each, each month, but that also means that things overall are more expensive. So you know, they're kind of canceled out there.
Brendan Mullooly:I think it's more planable too. I mean, I know something that we've said over the last year or two with inflation, the way that it's been is, you know, we can plan for bad stock markets, volatile markets, all that. That all gets factored in. But but something that is Very tough to to incorporate into plans, at least over long periods of time, would be inflation that stays persistently high, like you know 8.7 percent increase in Social Security Benefit Cola last year, 5.9 before that. If we were continuing on a high trend like that for a multi-year period, you know things, things really get difficult then. So to see it coming back towards trend, yeah, I mean a smaller dollar increase in last year, but I think the environment overall probably feels feels better.
Casey Mullooly:I would agree there. I think maybe that's one of the silver linings of, you know, experiencing this spike in inflation that we did in 2022 and 2023 is it got inflation back on some people's radar. It is one of the biggest obstacles in retirement planning that we do have to factor in. I feel like people were, maybe were kind of lulled to sleep a little bit, you know, in the for the 20 years prior because inflation wasn't really a story at any point in time, and the last two years, seeing things go up in price and seeing the headline numbers come in, got up to close to 10% there. So at the very least, getting that back on people's radar might be a good thing and might make them realize that, hey, inflation is a big thing that we have to account for in retirement, and whether that means keeping them invested in the stock market, wanting to maintain the appropriate amount of risk instead of air quotes, moving to safer investments in retirement. That's a common thing that we see when putting together retirement plans and talking to clients here.
Brendan Mullooly:You got opposite ends of the spectrum. There are things at odds with one another. You've got to combat market volatility in the short term to make sure you can get the income that you need. You don't want that moving around with the market, but you can't have too much safety in the portfolio in the name of side stepping or avoiding volatility, because in the long term you need things that are going to give you a real rate of return above the rate of inflation, and best way to do that over time has been exposure to the stock market, and that's why you end up with a mix of stock, bonds, cash in a portfolio, because they all serve different jobs and it's more about finding the balance between those things than it is about being in any one of them.
Casey Mullooly:Specifically, Even 2% inflation. 2% is kind of the Fed's target, of what they want to see it at.
Brendan Mullooly:Historically it's been a little more than that, but less than three, I think so like two and a half, depending on how far you go back.
Casey Mullooly:So that's what we're using in our retirement projections, and even that in between two and 3% over long periods of time.
Brendan Mullooly:Over an average retirement, meaning multiple decades. I mean you're purchasing power at some point throughout that gets halved.
Casey Mullooly:So the idea is, you want to have exposure to the stock market to counteract that and hopefully earn more than that. So one of the other things I thought about with the cost of living adjustment was, if you wait until you're 70, you're going to be getting a larger benefit, and that means that each time there's a cost of living adjustment, a larger amount is going to be adjusted for.
Brendan Mullooly:So you've got that factored in addition to the increase that you get by default just by waiting to collect at a later age. So you've got that. You've got both benefits working for you if you're able to defer.
Casey Mullooly:Another reason to wait as long as you can to claim social security.
Brendan Mullooly:Yeah, no, and like you guys talked about last week, I think it's got to be situational because you can't be delaying just for the sake of it. It's got to be right for your situation. But even the idea of being in a position to make that choice, I mean you've got to take a step back there and give yourself a pat on the back and recognize that you're in fortunate circumstances to be considering whether to rely on your own savings sooner, to delay, or vice versa, like having the choice. I think you're in a better position than a lot of other people out there. Some people. It's just plain old necessity and you got to take it when you need it.
Casey Mullooly:Yeah, that's a good point. So I have some more numbers here about who is claiming early, who's waiting and who's somewhere in between. So I'm going to be referencing an article from Marcia Mantell. We found it on ThinkAdvisor and she went back and looked at who's claiming early and who's waiting. So in 1958, we're going way back here. This was just interesting. We'll get to more recent times, but in 1958, 50% of males and 62% of females were claiming early at 62. You know that was a long time ago, but I just thought it was interesting to see those numbers.
Brendan Mullooly:Yeah, I mean. I'm wondering too if the increase in average life expectancy since then impacts how soon people take it, because you adjusted maybe for how long people were living on average then versus now, and maybe 62 back then is closer to like 65 or six or seven today. I don't know the actual numbers or how they shake out, but like that could be a factor there.
Casey Mullooly:Definitely could be so fast forward to 2022. 28% of males claimed Social Security early at age 62 and 30% of females claimed early at age 62. So a big step down from what it was in 1958, whether that's due to increasing life expectancy or better education and understanding the benefits of waiting, that is a positive sign, I think, in terms of, you know, less people claiming early, which means more people getting more benefits.
Brendan Mullooly:Yeah, later on. I mean, I think you know it could be people staying in the workforce longer too, because claiming early you know, the big hang up with wanting to claim prior to your full retirement age is always if you're still working and you want to do that, then you've got the earnings limit that's going to reduce your benefits. You know. A dollar for every two above the threshold.
Brendan Mullooly:I think, is the way that it works, so that could be keeping some people out of their benefit too, if they're still in a position where they're working and earning more than I think. The number is like 21,000 and change per year.
Casey Mullooly:Yeah, yeah, that's another good point. Okay, so now we're going to look at who is claiming between 62 and full retirement age. We're going to look at 2008 and 2022. So 82% of men claimed or claim social security between the age of 62 and the full retirement age 82% in 2008. Now in 2022, that number went down to 60%, and it's similar for females. In 2008, nearly 85% of women claims between 62 and full retirement age, and that number went down to 62% in 2022. So kind of the same trend we were seeing before, that less people are claiming early and more people are waiting till either full retirement age or later.
Brendan Mullooly:Yeah, and it's a. I'd love to see the year by year breakdown of when people are claiming, because I'm curious. I'd be curious whether people a lot of the ones between 62 and their own full retirement age are claiming at 65, simultaneous with enrollment in Medicare, because, just psychologically, a lot of people feel better about their Medicare premiums being deducted from social security than paying them out of pocket.
Casey Mullooly:That's a big thing that I don't think a lot of people realize. You know, claiming social security and Medicare at least Medicare Part A kind of go hand in hand, yeah, simultaneous thing, yeah, so if you do decide to claim your social security benefits at age 62, you are also automatically going to be enrolled in Medicare Part A? Am I understanding that correctly? Yes, so usually Medicare it starts at age 65.
Brendan Mullooly:65 is when you're eligible for Part B. Most people, when they think of Medicare, are thinking of Part B, which is like outpatient services, and Part D, which is like your prescription benefits, but Part A is hospital insurance. I believe, and that is the threshold for qualifying for that is a lot lower than the threshold to qualify for full on Medicare, because I'm drawing a blank on the number of work years that it takes to do that, but the threshold is lower. So almost everybody qualifies for that on their own, even if they had, you know, a somewhat short work history.
Casey Mullooly:You know, when we're talking with clients about maybe retiring early, retiring before they had originally planned and earlier than age 65, I feel like healthcare expenses are usually– the one of the main trouble areas, I would say, for trying to figure that out, because getting the coverage you need in the open marketplaces is very expensive.
Brendan Mullooly:It can be. I think the biggest problem is usually that the place where most folks have the majority of their nest egg, that they're trying to make up the difference in terms of replacing their income if they're retiring prior to age 65, let's call is in some you know a pre-tax retirement account like a 401k or something like that, and if they're going to start pulling income from that but to replace their workplace income, their need is probably lower than it was when they're working because they're not doing all the saving that they used to do, making the switch from working to retirement. But they're still going to have a lot of taxable income since all of that money is pre-tax coming out. So there's still going to be a relatively high tax bracket if they're trying to maintain their lifestyle from pre-retirement.
Brendan Mullooly:And what that does is it puts them in a position where the marketplace health insurance plans are pretty expensive, because you know I'm just thinking of folks that if you had stockpiled savings in you know a savings account or in a brokerage account, you can be strategic about pulling income from those sources and have really low taxable income for a few years prior to 65. And if you're in a position like that, you might qualify for some cheaper marketplace health insurance plans just based on having low taxable income that you show when you're going to qualify. You might even get you know like rebates, things like that, like savings on marketplace plans. So it just depends on the composition of your income when you're making that choice. But it's a huge cost if you're paying, you know, full freight for a marketplace plan. I don't think most folks realize how much of that cost is often covered by their employer, even if they're paying in premiums themselves a little bit.
Casey Mullooly:Yeah, I think having that flexibility of you know, brokerage savings or even a Roth IRA would work. In that instance of having money that isn't in a tax deferred account, having that option to pull from there first instead of tapping into the 401k or an IRA, is huge, and I think that you know that's. One of the things that you have to balance is deciding where to put those dollars. Obviously, you know the benefits of tax deferred accounts are great, but they're not perfect and nothing is in the financial world. Yeah, you just have to find the right balance of saving in tax deferred accounts versus saving in non-tax deferred accounts.
Brendan Mullooly:Especially, and just be just being intentional about it, because I think it's easy to use the pre-tax 401k and just and let that have it ride, because a lot of times you're you're defaulted into it.
Casey Mullooly:It's easy.
Brendan Mullooly:It's easy. And for that reason it's great.
Brendan Mullooly:But I think that is you get closer to realizing what your retirement date may be and the circumstances may be. At that point in time, I think that it could be wise to diversify the saving stream and consider if having different buckets would be advantageous, depending on your plans. And it might be that you go through that exercise and it really just is that you keep plowing it into the pre-tax account as much as you can, or maybe you make some adjustments.
Casey Mullooly:You're going to be in a better situation the earlier you recognize this and the more that you can plan for it. So maybe you're in your mid to late 50s, you want to retire before Medicare kicks in at 65 and you've got, let's say, six or seven years there to put away some money and maybe this is the time to have the conversation of do I put it in my 401k or do I just put in a regular brokerage account.
Brendan Mullooly:Also, I think maybe some important milestones, like if you're hitting your max in your 401k not taking that as a signal that you're doing as much as you can I mean you're maximizing that account specifically but if you're capable of continuing to save above and beyond that I think 401k contribution limits are always dollar limits. I think that you should strive to have a percentage goal in terms of how you save and so if your percentage goal is higher than the dollar limit for the 401k, that's a great signal that you should be looking at what other options you have and that's I mean, if you're in a position to do that. That's wonderful and good on you for putting yourself at that point in your career. So I think you just got to be kind of as in of those circumstances and take advantage and make sure that you're not just rolling on autopilot and not thinking that stuff through if your goals warrant it.
Casey Mullooly:Yeah, it's definitely worth considering and running the numbers on that decision before you are deciding to retire or even in you know, the next 12 months it's. You want to give yourself as much runway as possible to make that decision and I think it speaks to the importance of those pre-retirement years and how you know, even working and saving for another year or two, instead of drawing down your portfolio and leaving the workforce and having to pay for things like healthcare out of pocket those even even just a year or two difference can make, can make all the difference when it comes to your retirement picture. So, bren, I want to thank you again for for joining me on this week's episode of the Mullooly asset podcast. I think that's going to do it, unless you have any last minute thoughts that you want to get in here.
Brendan Mullooly:No, no, it was a good good conversation all things that people should be thinking about when, when they're thinking ahead, hopefully, to their retirement. I agree.
Casey Mullooly:So thanks again for listening to this week's episode. This was episode 457. We'll be back with you next week for 458.
Brendan Mullooly:Tom Mullooly is an investment advisor representative with Mullooly asset management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Mullooly asset management may maintain positions insecurities discussed in this podcast.