Oceans of ink have been expended on the topic of when you should claim your Social Security retirement benefit. Most of us know the basic rules for navigation. If you need the money, take it. If you don’t need the money think about delaying the benefit. This is because taking Social Security at age 62 means no future growth for the benefits except for annual COLA increases.
Consider information from AARP’s online Social Security Calculator for an illustration. I entered data to explore what someone born in 1960 would be able to obtain from Social Security in 2022. The assumption is the person had an average annual salary of $80,000.
The following is a breakdown of the Social Security monthly payment projections based upon claiming it at ages 62 thru 70 with the 2021 cost-of-living-adjustment (COLA):
|Age for Claiming Social Security||Monthly Benefit|
But an important factor is missing in these projections and forecasts from other calculators. That is the Medicare Part B premium.
Age 65 promises us calmer seas in retirement owing to Medicare for our health care, but it comes at a cost. The Medicare Part B premium is subtracted from the monthly Social Security benefit. If you take Social Security at age 62 it means you are electing to freeze your benefit’s growth. As a result, the benefit does not grow 5/9th of one percent for each of the 36 months from ages 62 thru 65.
Another aspect to consider in taking Social Security earlier than age 65 is understanding how the Medicare premiums escalate over time. Your Social Security’s COLA is based on general inflation or the Consumer Price Index-Urban Wage Earners and Clerical Workers (CPI-W), which is a measure of general inflation.
The Medicare Part B premium by contrast changes yearly based on the program’s expenditure growth, which reflects spending for covered medical services. The Social Security COLA and the Medicare Part B premium over the years have not changed at the same rate.
Here are Social Security COLAs and Medicare Part B premium increases for the last six years:
|Year||Social Security COLA||Medicare Part B|
Social Security COLAs averaged about 2.2% compared to the 6.1% annual increase in Medicare Part B premiums from the years 2000 to 2018 when general inflation was relatively low while health care costs exploded. The result was the Social Security COLA cumulatively increased approximately 50% while Medicare Part B premiums soared to almost 195% during this period.
Whether to enroll in Part B is a personal decision based on your individual circumstances. The Medicare Part B premium must be paid at age 65 unless you are still working and are covered by the employer’s health care plan. Understand how your health insurance coordinates health care with Medicare in order to make the best decision for you. If you don’t get Part B when you are first eligible, the premiums may go up 10% for each 12-monh period that you could have had Part B but neglected to sign up.
Be guarded if seeking input from some financial planners for guidance on deciding to retire before age 65. Sometimes the Medicare Part B premiums do not appear in the plans constructed for retiring prior to age 65. I’ve seen several such plans where the Medicare Part B premiums are not identified as an expense in the future years starting at age 65. Some plans merely alert you to be mindful of health care costs usually increasing as you age.
Omission of the details of Medicare Part B premiums in a financial plan, especially for those interested in retiring prior to age 65, can create confusion. A consumer poll conducted by Mass Mutual earlier this year of Americans approaching retirement disclosed more than half of those surveyed did not understand the basic aspects of Social Security.
Overly optimistic people may think they will experience a very healthy retirement. Such confidence combined with unfamiliarity of the Medicare premium may lead to hoping health care expenses in their circumstances will be even lower than any projection provided in a financial plan. Unfortunately, even the luckiest in health, cannot avoid the monthly Medicare Part B expense.
If a financial plan does not specifically address Medicare Part B premiums – to include projections for Medicare’s yearly expenditure growth – get a new financial plan. And remember: anticipating Medicare Part B premiums properly are twice as important to get right in the case of a married couple.
So, what about a person still eager to retire before age 65 and not desiring to access Social Security until age 65?
Your TSP, IRAs or other assets are sources from which the income you will need to replace the forgone Social Security benefits would come. This strategy may require increasing contributions, other savings, or changing some lifestyle expectations. Delaying retirement or part-time work are also tactical alternatives.
Remember this important concept as an incentive for the goal: Deferring Social Security allows the benefit to grow a total of 20% from age 62 thru 65. This growth occurs from the 5/9th of one percent each of the 36 months during period of the delayed access
My parting advice is to be aware and to be prepared for the Medicare Part B premium as an essential element showing up as a deduction from your Social Security benefit when you turn 65 if you are retired. If you can postpone taking Social Security until age 65, your reward will be a larger Social Security benefit at that age to pay for the Medicare Part B premium, and the longer you may live, the more motivation there is for doing so.
Francis Xavier (FX) Bergmeister, CFP®, CLU®, ChFC®, CASL®, ChSNC® is a graduate of the Wharton School. His graduate work includes a Doctor of Arts from George Mason University. He is a retired U.S. Marine Colonel and FBI Analyst. He provides seminars to federal employees and is the owner of Semper Why, LLC.