Announcer:
It’s time now on KROS for Financial Focus, brought to you by Nelson Corp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research Incorporated, a broker dealer, member FINRA, SIPC, Investment Advisor Representative, Cambridge Investment Research Advisors Incorporated, a registered investment advisor, Cambridge and Nelson Corp Wealth Management, are not affiliated. Cambridge does not offer tax advice. Now here’s today’s Financial Focus program.
Nate Kreinbrink:
Good morning, and welcome to this week’s Financial Focus brought to you each and every Wednesday morning right here on KROS. Well, this is Nate joined again by James this morning. We were able to walk up today, which was kind of a surprise given the white stuff that was falling from the sky there just a couple of days ago. I think as everyone said, I’m not quite ready for that. Although you see some people that were already out building snowmen and doing that type of stuff.
James Nelson:
Not yet. We’re not even to Halloween or Thanksgiving. We don’t need snow yet.
Nate Kreinbrink:
No, you said we’re not even at the Halloween. Seen some people have already started putting some of that Christmas stuff up. So for those that did, I think we can blame this last snowfall on those individuals.
James Nelson:
Yeah, it’s all their fault. It’s all their fault. We got Big 10 football starting this weekend. We don’t need snow.
Nate Kreinbrink:
We do. A lot’s going on. World Series going on, Big 10 football starting back up, which is going to be good for a lot of people and getting that underway. So excited to see what that brings. I know we were kind of talking a little bit on the way up here, James, that there’s also been some changes on the social security front since the last time that we met. With them officially announcing the cost of living adjustment for 2021, which came in at 1.3%. as far as the increase on the social security benefits, not one of the larger ones, but still somewhat of an increase. And I think it’s interesting to look at how those costs of living adjustments over the last, say, 10 years compared to those costs of living adjustments say from 2000 to 2010. Where they actually came in roughly, on average, about a whole percent lower than what those costs of living adjustments were coming in there at the first 10 years of 2000 through 2010.
Nate Kreinbrink:
So it’s a trend that has continued on. What does that mean to an individual’s benefit who is already on social security? On average, for an average person getting a monthly benefit, it’s going to translate into an increase of about $20 a month, as far as an increase from what you were getting last year versus what you are going to be getting for 2021. Just strictly based on that cost of living adjustment. So again, there’s a lot of things that are going to come into play with that, where that factors in. We’ll talk a little bit about that topic. We’ll hopefully get to a little bit on how that impacts Medicare and what Medicare premiums are looking like going into 2021. But that 1.3% cost of living adjustment, as we were discussing James, isn’t always necessarily conducive to those individuals who are on social security benefits and what they’re actually spending their money on.
James Nelson:
Right, right. And the way that they calculate that formula is somewhat tied to the energy index, which is maybe a surprise to some people. But not necessarily what a lot of people on social security are spending their money on. A lot of people aren’t traveling or spending their money on a lot of fuel these days. But that cost of living adjustment is somewhat tied to the energy index. And since energy is down that kind of drags the overall average down when they run that formula, and in turn penalizes people that are on social security. They’re spending money on health care expenses and housing and food and whatnot, not necessarily a lot of gasoline these days. And it’s … I don’t know. We’ve almost come to accept these low cost of living adjustments anymore. It’s been several years, like you said Nate, that it just doesn’t seem like a whole heck of a lot. $20 a month, when five, 10 years ago it was generally higher than that.
James Nelson:
So yeah, that’s one of the areas that people miss, maybe sometimes, is how they determine that. But again, with where energy prices are and probably will continue to be for the foreseeable future, that’s not going to give that formula a real bump to generate that number any higher probably.
Nate Kreinbrink:
No, and that’s a lot of great points there, James. Because it doesn’t necessarily reflect a good correlation as far as those costs of living adjustments for senior citizens and those on social security benefits, as far as what increases are actually happening. As James mentioned, those on social security over the age of 65 and above, as he said, spend a lot of their retirement costs on healthcare and on housing, as far as an increase, if they go into an assisted living facility or something along those lines.
Nate Kreinbrink:
So again, you look at what it actually does, and although it is an increase we’ll have to wait to see for sure what actually comes about when the Medicare premiums for 2021 are actually released. Now, they haven’t officially been released yet. They should be here within the coming week or so. Usually by the end of October for sure they have those released. But some of the early reports that are coming in have them jumping up to about a little over $150 a month, which is an increase from about 144. For the part B premium, is the premium that I’m talking about for Medicare, as far as for 2020, raising up to a little over about $150 or so heading into that.
Nate Kreinbrink:
So again, if you’re on Medicare, you’re getting your social security benefits, you’re going to get that $20 a month increase, but you’re also going to see that increase when it comes to your Medicare premium as well. So that increase that you thought you were going to get from the cost of living adjustment, a big part of it is probably going to be eaten up by the increases in Medicare. So again, trying to understand that correlation where it comes into play, but again, doing some planning. And I think where we see the biggest part of this, especially with that trending of lower cost of living adjustments over the last 10 years, and probably going to continue if it continues this way into the future, is looking at what number you were expecting to get on your social security benefit for any financial plan. If you did any planning on your own, if you’ve worked with an advisor, what number did they put in for their social security benefit? Because with those lower cost of living adjustments with Medicare premiums continuing to rise, that number that you had factored in there and that you assumed that you were going to get for the rest of your retirement and the rest of your life, may not quite be as big as what you thought it was going to be, or have as big of a purchasing power impact than what you thought it was.
James Nelson:
Yeah, and that’s spot on. Because you and I have both put those plans together, Nate. And figuring an extra percent or two as far as a cost of living adjustment over the life of a plan can make a heck of a big difference. And if we’re assuming 2% and we’re getting 1.3, but not really 1.3 after the Medicare premium goes up, that’s a big difference. And that could really change the dynamic of the plan of somebody who’s really banking on that.
James Nelson:
And I think it goes back to what a lot of us have really come to realize in recent years, is a lot of this burden is now on the individual. We no longer have many pension plans out there. All the responsibilities on the employee to save in their 401k. Yeah, the employer might match, but the largest burden is on the employee. Social security, little uncertainty here. There has been uncertainty, but continues down that path with social security not quite being funded the way all of us would like. Again, the burden probably comes back on us as individuals to maybe not rely on it as much, or try not to rely on it as much, because there are going to be changes coming down the line. And Medicare, you brought up to Nate, as far as that premium going up, same thing. Nobody sees Medicare costs coming down. If anything, they’re going to continue to tick up like they have the last several years.
James Nelson:
So more of the burden is on us to try to save and do what we can while we’re working to make things hopefully a little bit better when we call it a day.
Nate Kreinbrink:
Right. And I think it just goes back to understanding your social security benefit, and if you haven’t already claimed, understanding the different options that are out there for you. Again, you’ve heard people say, “I need to take it early. I need to take it early or whatever, but understanding the impact that’s probably going to have on you in a negative way, not just by filing your benefit early, but then just think about any cost of living adjustment then is off of a smaller amount than what it would be off of a bigger amount if you delayed it just a little bit.
Nate Kreinbrink:
So again, before you claim you need to understand all the options that are available to you. If you’re married, coordinating those benefits between the spouses is extremely important to make sure that at least one of those benefits is maximizing as close to age 70 as you can wait. And obviously you’re going to have to have some other assets to bridge that gap, but a lot of times that gap provides you with opportunities to get some of those tax deferred assets that you may have. Traditional 401ks, IRAs out and tax at a lower tax bracket, filling up those lower tax brackets in years where you don’t have that additional income from social security than being forced to take it out later on at a higher bracket.
James Nelson:
Yeah, absolutely. And that a lot of people are taken advantage of that. And having these discussions before retirement makes all the difference. And yeah, it’s all of these things go hand in hand. We talk about it time and time again. The investments, the social security decisions go hand in hand with the taxes and the Medicare premiums. So having a plan, having everything coordinated, because you can’t change one without impacting the others. And it’s important to have these conversations before retirement versus, “I’m retiring next week. What can I do.”
Nate Kreinbrink:
What can you do?
James Nelson:
Very limited at that point.
Nate Kreinbrink:
I did one too … We are getting close here, but also did one, and we’ve talked in programs past, as far as the earnings test, and the earnings limit on any given year. That income limit for the earnings test was also announced and was raised to 18,960 for 2021, which is an increase of roughly 700 and some dollars, as opposed to what it was. That earnings test, as just the review, comes into play when you file for a social security benefit prior to your full retirement age. If you make above that limit, there’s going to be a reduction of your benefits, depending on how much you are over that. So, again, as a general rule of thumb, if you’re below your full retirement age, still working, it’s probably going to not be necessarily in your best interest to file for a social security benefit. If you’re thinking about it and you have questions, please talk to somebody before you pull or make that decision. Because again, a lot of those decisions that you do make are permanent and you’re locked into those for the rest of your life.
Nate Kreinbrink:
So did want to mention real quick though, before we are out of time that every Friday, Nelson Corp Wealth Management is wearing jeans for charity. Money raised in the month of October will be donated to the Med Tree, sponsored by Mercy One here in Clinton.
Nate Kreinbrink:
James, once again, I appreciate you joining me this morning.
James Nelson:
Absolutely.
Nate Kreinbrink:
Again, Nate and James with Nelson Corp Wealth Management, bringing you this week’s Financial Focus. Thanks again for tuning in, and have a great rest of your week.
Announcer:
Financial Focus is a production of Nelson Corp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only, and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research Incorporated, a broker dealer member FINRA SIPC. Investment advisor representative, Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and Nelson Corp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.nelsoncorp.com.