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Author: mikeydawgindm

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CALCULATE YOUR MONTHLY SOCIAL SECURITY PAYMENT

Do you ever wonder how much retirement income to expect from Social Security?

Many people do not understand how their Social Security retirement benefit works. Understanding this can help you calculate your benefit. Or, Social Security will do it for you (based on existing data). Just go to your MySocialSecurity account and use the Retirement Calculator. If you know how Social Security benefits are calculated, perhaps it can help you make better decisions when you approach eligibility age.  

Publication No. 05-10070 explains how your benefit amount is calculated. Prior to 2020, this form contained the income index factors as well as the worksheet. It appears now, you must go to the Annual Statistical Supplement, Appendix 2.A8 at www.socialsecurity.gov/policy/docs/ statcomps/supplement to find your indexing factors.

I'll try to make it easy:

Your benefit is computed from your income information in the year you turn 62. If you work past this, it will be recalculated when you reached your Full Retirement Age (FRA)

1. The first amount to calculate is your 'average indexed monthly earnings' or AIME.

To calculate your AIME, the SSA takes each year of earnings throughout your working lifetime, up to the Social Security taxable maximum for that year. Then, each year's earnings are adjusted for inflation, or "indexed." In the table, find the year of employment on the left and the year you turn 62 at the top. The intersection will determine the indexing value for that year’s income. Just take your earnings times this number and that is what’s used for that year.

An example, say you turn 62 in 2020. In 1980 (when you were 22) your earnings were 15,000. You would multiple this by 4.1671768 (on page 2.14 of the 2022 version) giving a total of 62,507.65. This is the amount you would use for that year’s indexed earnings.

The formula uses your 35 highest indexed years of earnings to determine your AIME. The calculation is done by adding the 35 highest years of indexed earnings together (years with zero earned income are added as 'zero'), dividing by 35 to find your annual average, and dividing this result by 12 to determine your lifetime monthly average. 

  • Next, find your Primary Insurance Amount or PIA. You use your AIME in the following manner. NOTE: This is for someone turning 62 in 2019. The income indices and PIA change yearly, so your calculations will most likely be different. The publication's Appendix D will take you through all these steps.

Your AIME is then used to determine your basic Social Security retirement benefit, which is officially referred to as your primary insurance amount, or PIA. This is the number that, along with your age at the time you apply, determines your initial Social Security benefit.

To determine your PIA, your average indexed monthly earnings are applied to a formula. For 2019, the formula is:

90% of the first $926 in AIME

32% of the amount of AIME greater than $926, up to $5,583

15% of the amount of AIME greater than $5,583

These percentages stay the same each year (under current law), but the thresholds (known as "bend points") change. The thresholds change with inflation, so make sure you use your year’s bend point amounts. These are represented by $926 and $5,583 above. Add these three numbers together to get your PIA.

As you can see, the system favors lower lifetime income levels to provide more relief to workers with less lifetime income.  

Here's an example of how this works: Let's say that I'm turning 62 in June 2019 and my average indexed monthly earnings are $5,000.  My PIA will be:

90% of the first $926, or $833.40

32% of the remaining $4,074, or $1,303.68

15% of the amount over $5,583, or zero 

Combining these three amounts gives me a PIA of $2,137.08 per month. Note that this isn't the actual amount I'd get if I claim at age 62. At 62, there would be a 28% discount (.56% per month times the number of months until FRA). It would be more like $1540.

A recap

So, in short, the process used to determine your actual Social Security retirement benefit is as follows:

Your average indexed monthly earnings, or AIME, are calculated as the average of your 35 highest-earning inflation-indexed years, divided by 12.

Your AIME is applied to the Social Security benefit formula, using the bend points that were in effect for the year in which you turned 62. 

Any applicable cost-of-living adjustments are applied to your PIA, based on the year in which you actually claim your retirement benefit.

Finally, if you choose to start your benefits at any age other than your exact full retirement age, your monthly benefit will be adjusted up or down.

REF: The Motley Fool https://www.fool.com/retirement/2018/05/26/heres-how-the-social-security-retirement-benefit-f.aspx

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If you’re like me, you did not realize you would pay for Medicare. Throughout most of my working like, I thought once we turned 65, medical insurance was free. I realized this was not the case in my early 60’s when I started managing my mother’s financial affairs. I started learning about the Medicare system and set about getting a handle on how to manage my Medicare after turning that magical age.

When you turn 65, most people are eligible to sign up for Original Medicare Part A (hospital insurance) and Part B (medical insurance). Generally speaking, Part A is free, but a premium is paid for Part B. Failure to sign up when eligible could result in future penalties of 10% per year. If you are already receiving Social Security benefits, you will automatically be enrolled by the SSI. Refer to the section on Medicare for more information. You would also be advised to take out a supplemental Medigap policy or enroll in a Medicare Advantage program. These are beyond the scope of this discussion. Let’s assume you have Original Medicare.  This section discusses a little known or advertised nuance of the Medicare program, called IRMAA.

The government labels people who receive Medicare “beneficiaries”. Medicare beneficiaries must pay a premium for Medicare Part B that covers doctors’ services and Medicare Part D that covers prescription drugs. The premiums paid by Medicare beneficiaries cover about 25% of the program costs for Part B and Part D. The government pays the other 75%.

IRMAA was created in 2003 through the Medicare Modernization Act of 2003 as it was a way, according to the Act, for Congress and the people “to begin to address the fiscal challenges facing the Medicare program”. The idea was (as are most tax surcharges) to have high earners pay more of their share for the program.

The first year of implementation was in 2007 with a surcharge being placed upon only the Medicare Part B premium. Basic Medicare was $93.50 per month and topped out at $161.40 per month (singles with MAGI above $200,000 and couples with MAGI above $400,000). Let me explain MAGI. It stands for Modified Adjusted Gross Income. For Medicare purposes, It basically is AGI (line 11 of your 1040), with the addition of: untaxed foreign income, non-taxable Social Security benefits, and tax-exempt interest.  MAGI differs within the IRS system, so make sure you understand the MAGI used for the particular item you are evaluating.  

Over the years, there have been a couple of changes, with the biggest change being in 2010 with the passing of the Affordable Care Act (ACA) as it called for the IRMAA surcharges to include Part D (prescription drug coverage) too.

In 2011, Basic Medicare Part B was $115.60 ($85,000 or less for singles, $170,00 or less for couples) with a maximum of $369.10 (singles above $214,000 and couples above $428,000). In addition to this a Part D (prescriptions) monthly surcharge was added to whatever your Plan Premium was, beginning at $12.00 (singles over $85,000 and couples over $170,000) up to $69.10 (singles above $214,000 and couples above $428.00. If your MAGI was over $428,000 for a couple, both on Medicare you would each pay $438.20 per month, or $5258.40 per year (For FREE Medicare, or so you thought!). On a somewhat bright side, the medium income for seniors in 2011 was $18,819. For them, Medicare Part B was $1387.20 for the year and Part D was what the plan premium was.  

The other major change to the IRMAA brackets happened in 2018 with the passing of the Bi-Partisan Budget Act. This Act created a 5th bracket to IRMAA while also stipulating that this new additional IRMAA bracket would not be adjusted for inflation until at least the year 2028.

This caused the premiums to be $135.50 (above $85,000 for singles, $170,000 for couples, up to $460.50 (singles above $500,000 and couples above $750,000) and a Part D surcharge ranging from $12.40 per month up to $77.40.

As you can see, both the income levels and premium amounts have increase over time with the stated goal of the legislation being to “maintain these income thresholds associated with income-related premiums until 25 percent of beneficiaries under Parts B and D are subject to these premiums”.

As I write this in December of 2021, the 2022 premium levels are from $170.10 (up to $91,000 for singles, and $182,000 for couples), to $544.30 (Part B) and zero to $71.30 (Part D) for high earners.

But here’s the rub – they look back 2 years! So, when you reported $185,000 MAGI back in 2019, little did you know it was going to cost you $3006 in 2022 in Medicare premium.

What to do?

The structure is stair-stepped, this means, if your MAGI is exactly $182,000 (couple filing jointly) then you will pay $2041.20 for Part B ($170.10 per month). But if it is $182,001, you will pay $2041.20, plus $816.00 (Part B surcharge) plus $148.80 (part D surcharge) for a total of $3006. Said more grimly, $964.80 more (47.2%) for $1 more income.

The first order of business is to be very aware of the ranges! Use a worksheet and calculate your anticipated income for 2022 that will be applied to your MAGI. It could be easy for you to manipulate your income if you control any of it (employment, IRA distributions). You may decide to reduce the number of hours you are working or reduce or suspend your monthly IRA distribution amount). Make sure you account for income you don’t directly control (Social Security payments, pension, CD income) before you try to tweek the variable amounts. There are precious few types of income that are not applied to the IRMAA calculation - Health Savings Accounts, Roth investments and Life Insurance.

You may be able to get relief in your income is significantly less than it was 2 years ago if you have experienced one of these 7 events:

Death of spouse

Marriage

Divorce or annulment

Work reduction

Work stoppage

Loss of income from income producing property

Loss or reduction of certain kinds of pension income

Retiring is one of the primary reasons people use to get an adjustment to their IRMAA calculation. You must first file an appeal for reconsideration. This can be done by calling the Social Security Administration or writing to them. You can find out what and how at https://www.hhs.gov/about/agencies/omha/the-appeals-process/index.html.

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My 50 month experiment is over. My FRA (Full Retirement Age) is 66 years and 2 months, so as of August, I'm officially at FRA. As you may know, I took SS as soon as I could after turning 62 in June of 2017. 

I started with a theoretical balance of $200,000 in an IRA invested in Vanguard's Dividend Appreciation Admiral Fund (VDADX). I ran an experiment where I had three scenarios:

1. Draw down an amount equal to the 'net' amount needed to match an SS payment, waiting for FRA to file for SS. This is for an Iowa taxpayer, who basically pays state taxes on IRA distributions, but not on SS payments. Most taxpayers pay federal taxes on 85% of their SS payment.

2. Claimed at 62, invested the check, and drew down the IRA as in scenario 1.

3. Filed at 62 and left the IRA untouched, using the SS payments for expenses.

Results:

total SS income - $105,150

Accumulated value of SS investment - $154,333 (this includes $5110 in dividends)

Scenario 1 (Willie Waiter) -  IRA balance of $186,360. Claiming at FRA would amount to $2853/month ($721 more than I'm getting now)

Scenario 2 (Irma Investit) - IRA balance of $186,360 Plus $154,333 from the invested SS payments, for a total of $340693.

Scenario 3 (Sam Spendit) - $349,483 in the IRA account

This fund (VDADX) in the time period tested, averaged 11.3% annual return. The future cannot be predicted, but at this rate, waiting would never make sense. If the fund averaged what the general stock market has averaged since 1929 (depending on who you ask) that is roughly 10%, also higher than the SS enticement of 8% annual increase.

At least during this time span, filing at 62 was the right thing to do for me. Technically, I have a $149,483 nest egg courtesy of Uncle Sam (the difference in my portfolio by not touching my own savings). 

Your mileage may vary!

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OUCH! Corona virus news got serious and bad real fast. By the end of the month, the Dow Jones Industrial average had retreated 10.5%, and as I write this in mid-March it's gotten a whole lot worse! It is a time like this that makes it extremely hard to stay the course and not panic. The experts will tell you historically people who cash out of their investments due to the news of the day normally don't time it right, and more devastingly, don't get back in at a good time either. So they lock in and guarantee their losses. It's hard to do, but I'm staying fully invested, optimistic an end to this pandemic comes sooner rather than later, and the underlying good health of our economy restarts. Take care of your health and the health of your loved ones, we will get through this!

SCORECARD

Our fund, VDADX, was down about 8.9% for the month of February.

Willie had a month end balance of $169,870.17. His monthly benefit check (including the COLA) would be $2,574.05 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $2100 check and withdrew $2520 from her existing account, so her net total is $243,615.28. Her Social Security investment account now has $73,745.11.

Sam used his benefit check to supply $1680 of his monthly expenses. His untouched IRA account sat at $247,184.65.

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I read an article in a financial magazine recently that answered the question, “How does my life expectancy factor into my Social Security claiming decision?”. I've addressed the basics of what life expectancy is in a posting under the CESS tab. The article, like so many others, only treats the benefit as an annuity decision and not an investment decision. The article basically states what I've read many times –“ if you expect to live to be 80, delay claiming until age 70”. Why do I completely disagree with this? In my blog post, I state that (actuarily) a 62 year old male born in 1955 has a 12.66% chance of dying before age 70 (females are apt to live longer). This means 107 men (of 838) in this cohort will not collect a dime themselves. It's well known the payments are structured to equal out (regardless of what age you were when you claimed Social Security) at age 80. Everyone who reaches age 80 would have the same amount of total payments. For males, another 226 of that 838 would never reach this threshold. Put another way, if you've lived to be 62, you have a 40% chance of short-changing your Social Security benefit payment total. I will address how the effect of compound interest makes it even worse (by waiting to file) in a future post.

The impeachment circus in Washington dominated the news cycle this month. Will the Democrats ever stop hounding the President? It seems the market has become numb to the doings in Washington and rarely reacts for long on impeachment developments. The market (Dow Jones average) had a good steady month.

SCORECARD

Our fund, VDADX, was up about 2.8% for the month. Each year, in January, a cost of living adjustment (COLA) is applied to benefit payments. For 2020, this is 1.6%, or $33 for Irma and Sam.

Willie had a month end balance of $190,227.06. His monthly benefit check (including the COLA) would be $2,533.78 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $2100 check and withdrew $2520 from her existing account, so her net total is $268,905.67. Her Social Security investment account now has $78,678.61.

Sam used his benefit check to supply $1680 of his monthly expenses. His untouched IRA account sat at $269,785.74.

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I hope this is not news to you, if it is, I hate to be the bearer of bad news, but the federal (and usually the state) government taxes your Social Security payments. What? Pay taxes on distributions from taxes I was assessed while working? Instead of moaning and groaning about it. We need to figure how best to maximize our situation.

What is the net amount of your Social Security benefit check? In other words, what do you really have to spend after income tax considerations. I take into account federal and state income tax in the SCORECARD calculations. The federal tiers were changed in 2018. Prior to that, our three retirees were in a 28% tax bracket. Beginning in 2018, their federal tax bracket is 24%. Each state has its own way of handling income tax, so you need to know your state's treatment of IRA distribution and Social Security payments to understand the impact on your net income. Our retirees all live in Iowa where their IRA distributed funds are taxed in 2017 at 8.98% (Iowa's highest tax bracket) and Social Security income is not taxed at all.

Trust me, I've done the math for the following examples! In my SCORECARD, in 2017, I assumed the net available after income taxes for the Social Security benefit was 76%. I arrived at this ratio by calculating that 28% of 85% of the payment is taxed (federal tax is applied to 85% of the Social Security income for these three) and there is no state income tax. The amount is really 23.8%. To simplify, I used 24%. This is reflected in the amount Sam has available to spend each month. For IRA withdrawals, I need to add federal tax on the remaining 15% of the amount, plus 8.98% Iowa state tax on all of it. So we add 28% of the 15% not taxed plus 8.98% of the entire amount to arrive at approximately 20.8% more needed from our IRA account to net out the same. Again, for simplicity sake, I used 21% as the added amount needed to withdraw from an IRA versus the Social Security payment. This will be reflected monthly in the amount available to Sam to spend each month. Beginning in 2018, the tax rate was reduced to 24%, so the 24% and 21% figures were reduced to 20.4% and 18.8% respectively. Starting in 2020, Iowa's top bracket is reduced to 8.53%, so I further reduce the gross amount needed from the IRA to 18.4%.

For example, for a social security payment of $1971 in 2017, the amount federally taxed was $1675.35. 28% tax on that is $469.10 for a net of $1501.90. Using a $2382 IRA distribution, federal tax is $667 and state tax is $214, for a net of $1501. Using my simplified 21% taxation impact, the amount distributed is $2384.91. This is close enough to use the simplified calculation.

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The market (Dow Jones average) had a good steady month.

Our fund, VDADX, was up about 2.8%.

SCORECARD

Willie had a month end balance of $201,366.98. His monthly benefit check (including the COLA) would be $2,203.99 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $2011 check and withdrew $2413 from her existing account, so her net total is $234,518.37. Her Social Security investment account now has $33,151.39.

Sam used his benefit check to supply $1583.24 of his monthly expenses. His untouched IRA account sat at $235,447.93.

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The market (Dow Jones average) had a good start, but steadily declined in the latter two-thirds of the month finishing down about 500 points. Don't let that number spook you too much. On Black Friday (September 29, 2008) the Dow dropped 777 points in a single day. That represented a 7% drop. 777 points on June 30, 2018 would represent a little over 3%. Even though it is still a loss and worth getting your attention, it is not nearly the same impact it was 10 years ago. Stay the course!

Our fund, VDADX, was up a bit despite the Dow Jones average being lower.

SCORECARD

Willie had a month end balance of $197,253.81. His monthly benefit check (including the COLA) would be $2,189.54 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $2011 check and withdrew $2413 from her existing account, so her net total is $227,396.88. Her Social Security investment account now has $30,143.07.

Sam used his benefit check to supply $1583.24 of his monthly expenses. His untouched IRA account sat at $233,384.97.

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It's been one year since I made the decision to claim Social Security benefits. There was an early rise then steep fall during the last half of the month. This caused the running tally to be less than it had been by motn's end. I try not to take 'snapshots' of my position, because it can greatly distort trends. Although I seldom worry about trends, it's prudent to be aware of what the market is doing.

Our fund, VDADX, was down a tad from May month end, but again, just like clockwork every 3 months, we received a dividend. This time 15.35 cents per share! For Irma, this amounted to nearly $150 in her Social Security deposit account.

SCORECARD

Willie had a month end balance of $190,676.11. His monthly benefit check (including the COLA) would be $2,175.18 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $2011 check and withdrew $2413 from her existing account, so her net total is $218,496.97. Her Social Security investment account now has $26,865.30.

Sam used his benefit check to supply $1583.24 of his monthly expenses. His untouched IRA account sat at $222,875.77. He has reinvested more than $4,000 of dividends in the first year.

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Sell in May and go away?

This well known adage is based on the historical underperformance of some stocks. The theory basically states that many traders are on summer vacations and therefore the reduced activity causes reduced stock prices. However in recent years, especially 2016, this would have been a huge mistake as the market rose 10%. Trying to time the market, based on these types of strategies could work or might not. I have tried to time events and have chased last year's winners and I have found the best policy for total return and peace of mind is to do nothing.

May was another month that at various times would tax your resolve to stay the course. A few ups and downs but generally the month was positive. Our fund, VDADX, was up from April month end, 27.64 versus 27.17.

SCORECARD

Willie had a month end balance of $193,579.56. His monthly benefit check (including the COLA) would be $2,160.92 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $2011 check and withdrew $2413 from her existing account, so her net total is $218,496.97.

Sam used his benefit check to supply $1583.24 of his monthly expenses. His untouched IRA account sat at $219,190.99.