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TRUST AND ESTATE PLANNING NEWS

Research by the federal government indicates that Social Security retirement benefits make up almost 38% of the income of Americans age 65 or older. Thus, the decision as to when to begin to take Social Security retirement benefits is an important one. It's also an irrevocable decision. Once you decide to begin receiving Social Security retirement benefits you cannot change your mind. The initial benefit will serve as the "base" amount for the rest of your life, subject only to adjustment for increases in the cost of living.

The decision is a little less complicated if you separate when you want to retire from when you want to begin receiving Social Security retirement benefits; these two events don't necessarily have to occur at the same time. An understanding of how your benefits are calculated, how they are taxed, and what happens if you continue to work after beginning to receive benefits, is also important.

"Normal" Retirement Age - "Full" Benefits

For many years, normal retirement age (NRA), the age at which "full" benefits - 100% of an individual's Primary Insurance Amount (PIA) - are available was set at age 65. This is still true for those born in 1937 or earlier. However, for those born in 1938 or later, NRA gradually increases until it reaches age 67 for those born in 1960 or later.

Early Retirement - Reduced Benefits

Age 62 is generally the earliest age that someone can begin to receive Social Security retirement benefits. However, if retirement benefits begin before the "normal" retirement age, the benefit paid is reduced to reflect the income that will be paid over a longer period of time. The amount of the reduction varies with the year of birth. For example, an individual born in 1937 (NRA = age 65) who began receiving benefits at age 62 had his or her retirement benefit reduced to 80% of what it would have been had he or she chosen to wait until normal retirement age. However, for a worker born in 1962, for whom NRA is age 67, choosing to receive retirement benefits at age 62 results in an initial benefit reduced to 70% of what it would have been had the individual waited to age 67.

Delay Retirement - A Bigger Benefit

What happens if you decide to wait and take your retirement benefits later than your NRA? You get paid for waiting, in the form of a larger retirement benefit. For each year beyond your NRA that you delay receiving retirement benefits, up to age 70, your benefit is increased by a specified percentage of the PIA. The amount of the credit for each year of delay beyond NRA will vary depending on the year of birth. For example, an individual born in 1935 who delayed receiving benefits until age 70 had his or her benefit increased by 6% for each year (five years in this case) beyond the NRA of age 65. For those born in 1943 and later, delaying retirement increases their benefit by 8% per year for each year they wait beyond their NRA.

Which is Better? - Early or Late?

One way to answer this question is to perform a "break-even" analysis, which estimates the age at which the total value of higher benefits (from delaying retirement) is greater than the total value of lower benefits (from starting retirement early).

If you expect to live longer than this break-even age you would likely benefit from delaying the start of Social Security retirement benefits. If you are in poor health, or if members of your family tend to die at relatively young ages, you will likely receive a greater benefit by beginning your benefits early.

Federal Income Taxation of Social Security Benefits

Under federal law, Social Security benefits may be subject to income tax. If one-half of your Social Security benefits plus your "modified adjusted gross income" (often the same as adjusted gross income) exceed certain limits, then a portion (up to 85%) of your benefits is taxable. For married couples filing jointly this threshold is $32,000; for all others it is $25,000. State or local tax treatment of Social Security benefits can vary.

If You Continue Working

If you begin taking Social Security retirement benefits early and also continue working, your retirement payments will be temporarily reduced if your earnings exceed certain limits. For this purpose, "earnings" generally include wages received as an employee or the net income received from self-employment. The amount of the reduction will vary:

• Under NRA: One dollar of benefits is lost for every two dollars you earn over $14,160.

 

• The year you reach NRA: One dollar of benefits is lost for every three dollars you earn over $37,680.

Once you reach NRA there is no reduction in your retirement benefits, regardless of how much you earn.

Medigap Policies Compared

Medigap policies are designed to fill the "gaps" in health insurance provided under the original Medicare Parts A and B. These policies must provide standardized coverage as specified by the federal government. The table below briefly compares and contrasts the different policies available. Some policies may not be available in all states so it is important to check on a state by state basis with an insurance professional.

Medigap Policies A-L
 

What's Included?

The following paragraphs provide a general description of the various policy benefits available in the standardized Medigap policies.

• Core benefits: Medigap Plans A-J - Includes all co-pays except that for days 1-60 of hospitalization, plus adding 365 days of hospital coverage after the standard Medicare benefit is exhausted; Medicare B coinsurance amounts after meeting the yearly deductible; the first three pints of blood. Medigap Plans K and L - Includes all co-pays except that for days 1-60 of hospitalization, plus adding 365 days of hospital coverage after the standard Medicare benefit is exhausted; for Part B, Plan K pay 50% of the coinsurance amount after the annual deductible is met; Plan L pays 75% of the coinsurance amounts after the annual deductible is met; Plan K pays 50% of the cost of the first three pints of blood; Plan L pays 75% of the cost of the first three pints of blood.

 

• Skilled nursing: Medigap Plans C-J - Pays the coinsurance amounts under Part A for days 21-100 in a skilled nursing facility. Medigap Plans K and L - Pays the percentage shown of the coinsurance amounts for days 21-100 in a skilled nursing facility.

 

• Part A deductible: Medigap Plans B-J - Pays the Medicare Part A deductible for the first 60 days of hospitalization. Medigap Plans K and L - Pays the percentage shown of the Part A deductible for the first 60 days of hospitalization.
• Part B deductible: Medigap Plans C, F, and J - Pays the annual Medicare Part B deductible.

 

• Part B excess charges: Medigap Plans F, I and J - Pays 100% of the excess charges. Medigap Plan G - Pays 80% of the excess charges.

 

• Emergency foreign travel: Medigap Plans C-J - The insured pays a $250 deductible and then 20% of any remaining costs of emergency health care. This benefit is typically limited to a $50,000 lifetime maximum and the first 60 days of each trip.

 

• At home recovery: Medigap Plans D, G, I, or J - If Medicare covered home health benefits are provided, the policy may pay up to $40 per visit for other, non-Medicare covered visits, with a yearly maximum of $1,600.

 

• Preventive care: Medigap Plans E and J - For non-Medicare covered preventive services, pay up to $120 per year. The insured pays all costs after the $120 limit has been reached.

Prescription Drug Benefits

A few Medigap policies issued before 2006 included a prescription drug benefit. However, beginning January 1, 2006, Medicare began a separate prescription drug coverage benefit, available to most Medicare beneficiaries. Medigap policies issued January 1, 2006, or later do not include prescription drug benefits.

Seek Professional Guidance

Professional guidance is strongly recommended when choosing a Medigap insurance policy. In addition to consulting an advisor, a number of governmental resources are available:

• Medicare: On the web at www.medicare.gov, or by phone at (800) 633-4227.

 

• State government: Many states operate a Health Insurance Assistance Program designed to provide information and assistance. Otherwise, the local state insurance department will often provide information about Medigap policies.

Robert Lopardo
President,ATG Trust Company

THE TRUSTED ADVISER is published by Attorneys’ Title Guaranty Fund, Inc., P.O. Box 9136, Champaign, IL 61826-9136. Inquiries may be made directly to Mary Beth McCarthy, Corporate Communications Manager. ATG®, ATG® plus logo, are marks of Attorneys’ Title Guaranty Fund, Inc. and are registered in the U.S. Patent and Trademark Office. The contents of the The Trusted Adviser © Attorneys' Title Guaranty Fund, Inc.

[Last update: 10-15-09]