Frequently Asked Questions About Social Security and Medicare

Securities and advisory services offered through National Planning Corporation, a member of FINRA and sipc, a registered investment advisor. Scriboni Financial Group, LLC and MPC are separate and unrelated companies. Welcome to the Common Sense Financial Podcast, a podcast all about finances, mindset and personal growth. The goal? Helping you make smart choices with your money in your home and in your business. And now your host, Brian Scribonia.

Hello everybody and welcome to episode number three of the Common Sense Financial Podcast. My name is Brian Scribonia. I have been in the financial services business since 1993 and I have had actual face to face conversations with thousands of business owners, families and individuals helping them develop solutions for real life situations. It's my goal with this podcast to bring these real life experiences to our audience and and offer a way to think about these topics and how they apply to your situation. One of the things I learned very early on in my career is that in order for me to be what I need to be for my clients, I had to surround myself with other professionals who can offer the resources and information that are outside the scope of what I can offer directly. Services such as with mortgages, taxes or legal matters require an outside provider to bring a comprehensive solution to my clients. Back in 1996, we identified and gathered a team of professionals together and and created what we now call our integrated resource Network. Today's podcast is an interview with our Social Security and Medicare resource, Rich Grauer. Some of you listening who are from St. Louis and follow college basketball may know Rich from his years of coaching at St. Louis University as well as his over 50 years of teaching in both public and private schools. Over the last 10 years, Rich has been a student of Social Security and Medicare and now educates the public about how these programs work. If you've ever been around Rich, you know that he is passionate about helping people in this area. Rich was in studio recently and I had the opportunity to ask him some of the most frequently asked questions I get from clients. Here's my conversation with Rich.

Hey Rich, thanks for joining us today. I've been talking to clients off and on a lot lately in the podcast about Social Security and Medicare. And you know, these are common things that we deal with with clients all the time and so jumping on with somebody that really knows this stuff inside and out is very much appreciated. So I appreciate your time today.

R Glad to be here Brian.

So, you know, one of I guess to start from the beginning, we probably should just start with just trying to explain how Social Security is determined and where Those numbers that people get on their statements, where those actually come from?

Well, first of all, to qualify for a benefit, you need what Social Security calls 40 credits. You can gain a maximum of 4 credits a year. And in 2017, you have to have earned and paid taxes. Social Security taxes on at least $5,200. $5,200 will earn you four credits for 2017. So to qualify for a benefit, 40 credits, four credits a year. If you work 10 years and earn four credits a year, you have qualified for Social Security with 40 credits.

So with 10 years and the 40 credits, that's. That's a, that's the full. That would be considered a full FRA, as we call it, full retirement age benefits at 65 or 66.

Well, it gets a little more complicated than that. What Social Security does, they first determine your full retirement age. The full retirement age is determined by the year you were born. So if you were born between, say, 1943 and 1954, your full retirement age is 66. If you were born in 1955, you. Your full retirement age is 66 and two months. And it's keep going up until, if you're born in 1960 or after, your full retirement age is 67. So people have to understand what is their full retirement age as a starting point to qualify for benefits. Once you've determined your full retirement age, what Social Security does is they take your 35 highest years of earnings. 35. Some people, there's a myth out there. Some people say it's five, your last five, or your last three. That is incorrect. It's 35 highest years of earnings. And if you don't have 35, Social Security gives you a zero. So it behooves people, if they can, to try to work and work 35 years where they've paid into the Social Security system. Social Security takes those 35 years of earnings. They index them to inflation. They then add them up, divide by 420, which is basically 35 years times 12 months, and they come up with an average monthly benefit. Now, it'd be great if you got that benefit, but Social Security then further reduces that benefit by applying a formula. Without going into great detail. That formula they apply is heavily weighted toward lower wage earners and middle wage earners. That's the way Franklin Roosevelt, when he set up the system, designed it so that lower wage earners would get a higher percentage of their final wages to help them out. The number that is finally computed is what you would get at your full retirement age.

So there's quite a bit to this.

Yes, it is.

So. So a quick question on that. So if somebody, if they're averaging it out over 35 years and they work 10 years, are those other 25 years zeroed?

That's right. And so it will greatly reduce their full retirement age benefit. Yes.

Okay, so I know if you start taking benefits early, say at 62, when you're eligible, and also if you delay the benefits till age 70, they can increase. So maybe just explain that a little bit if people take it early, how that's calculated and then how things go if people Wait.

Okay. There's a general principle that needs to be understood. The general principle is this. As you have said correctly, Brian, if you take your benefit before your full retirement age, it's going to get reduced. If you take your benefit after your full retirement age, it will get increased about 8% automatically a year until you reach age 70. Once you reach age 70, that 8% automatic increase, which is known as a delayed credit, is not applicable. So let's look at someone whose full retirement age benefit is say $1,000. So at 66, they get $1,000, but they decide to take it at 62. They will get 75% of their full retirement age benefit at 62, which means they would get $750 or a 25% haircut, a 25% cut.

Okay, so one of the other questions that I get quite a bit is when you have a spouse that maybe has never worked. So if you have a spouse, you have two people that are married and you have one spouse that's got the full credits, and then another spouse that's never worked, are they eligible to receive any spousal benefits?

The answer is yes. And let's explain it this way. There are basically two types of benefits, two general types of benefits. Number one, primary Social Security benefits. A primary benefit is based on your own work record. That's what generally we're talking about. There are secondary benefits or sometimes known as auxiliary benefits. Those are benefits you claim off someone else's work record. So in the case you described, Brian, a spouse who's never worked, maybe a stay at home mother, her husband has worked, he qualifies for his own benefit. A spouse can then qualify for a spousal benefit even though she's never worked. She can get at maximum, if she claims that benefit at full retirement age, 50% of her husband's benefit at his full retirement age. Again, let's just say the husband is entitled to a $2,000 a month benefit at full retirement age. The wife who's never worked at her full retirement age, 66, says, I want a spousal benefit off my husband. She can get $1,000, 50% of that 2,000 as a spousal benefit in both cases. Now, if either claims their benefit before their full retirement age, Brian, I can ask you this question. What's going to happen to it? It's going to get cut.

So when you know you have two spouses and one dies, then the greater of the benefits are paid out.

If you have two spouses and one dies and then a widow benefit or a widower benefit is an auxiliary benefit, not a primary benefit, and it can be claimed off the other, the surviving spouse. That is, if the surviving spouse has a benefit lower than the widower widower benefit. Now, there are some exceptions to this, but that gets very complicated. But yes, in general, if one of the partners dies, there's a possibility for the surviving partner to either claim his own benefit if it's greater than the widow benefit, or vice versa.

What about in a case where somebody has Social Security quarters, they've worked paid into Social Security, and then takes a government job, where they have a government pension and then they spend their remaining years working for the government and then get to retirement and they have this large government pension option. What happens to their Social Security benefits that they paid into?

Okay, now we have to again go back to is it a primary benefit or a secondary benefit? A primary benefit is one that you claim off your own work record. So in this case, let's just say we have a public school teacher, and that public school teacher has not has worked several jobs during the summer, during her college days or whenever. And she does qualify for a Social Security benefit because she has 40 credits. But she also has worked 30 years in a government job, public school system, or a government job and has never paid into Social Security. If she files for her Social Security benefit, she will get it reduced by something known as the windfall elimination provision, acronym is wep. And her Social Security benefit will be reduced. It cannot be entirely wiped out, but it can be reduced. And in most cases it is reduced about 50%. So if she were entitled to a full retirement age benefit of Social Security at, let's say, 500 bucks a month, and she was getting a public school pension or a government pension where she did not pay into Social Security, she would probably get reduced to about 250amonth. Unless there's always an. Unless there's always an exception. Unless she had 30 years where she paid in to the Social Security system. Then in that case, the wep, the windfall elimination provision, is wiped out. There is no wep, but that is very unlikely in most cases for someone who is in a government job with a government pension.

Sure, they'd have to be working a lot of years, right?

That's right. Now, again, that's the primary benefit. We talked about a secondary benefit. A secondary benefit is one you claim off someone else's record. So let's look again at the same example, a female teacher who's getting a government pension where she didn't pay into Social Security. She says, well, I would like to file for a spousal benefit off my husband's record. Or let's say her husband passes away. She says, I want to file for a widow benefit off my husband's record. Now a new rule comes into play, something called the government pension offset. It applies to any attempt by someone who's getting a government pension to file for a spouse or widow benefit off their husband. That government pension offset is basically going to virtually wipe out any attempt to get a survivor or a spousal benefit for that person. I could go into detail with examples and the formula government uses. But in general, suffice it to say this, in summary. If you are getting a government pension and you qualify for a Social Security pension, also, you will get something off your own record. But if you try to claim something off your spouse, more likely than not, you will not get anything or very little.

Okay, well, that's good to know, because that's a common question amongst specialty teachers and other people receiving that government pension. One other really common question for people is that when they know they're getting ready to retire, how long before they actually want to start receiving the benefits? When should they start the process? When should they start filing and trying to get that benefit started?

In general, we're dealing with government bureaucracy here. You can file for benefits one of three ways. You can file over the phone. You can file in person. Now, to file in person, you probably have to get an appointment because they're so backlogged and so crowded at the offices now, or you can file online. So, three ways to file. Because again, of the bureaucracy of the situation, I always advise clients to file. If you know you want to start in June, file two months before. If you want to start in August, file in May or June. Just give the bureaucracy a chance to get into operation and get your application filed. I will say this. If you are good with a computer, filing online is the quickest and easiest Way to file. In fact, when you go to a Social Security office, they have a sign outside their door that says, why wait in line when you can file online? And again, if you can do it that way, that's easiest. I think the least effective way, in my opinion, is to file over the phone. Because sometimes you don't get immediate documentation of your filing. You don't really know who you're talking to. So again, file online, file in person, file over the phone would be my order, my sequential order of ways to file.

Okay, so, you know, when we're visiting with people and talking about retirement planning, we're talking about taxable tax, deferred, tax free. We're trying to help people categorize their assets in a way that's tax efficient. We want them to make sure they're not only looking at rates of return and the amount of money they're actually receiving. We also want to be looking at their tax liabilities. So obviously Social Security plays a role in this. So once they turn that switch to start drawing Social Security, how do we know if that Social Security benefit is going to be taxable?

People are always asking me that question, are my benefits going to be taxed? And my answer is maybe. And it depends if Social Security, to determine whether your Social Security benefits are taxed, uses what is called provisional income. Provisional income is defined as your modified adjusted GROSS Income plus 1/2 or 50% of your Social Security benefits. So they add your modified adjusted gross income and 50% of your Social Security benefits. If that number is, if you're single, 25,000 or less, no tax on your Social Security. If that number is 32,000 or less, filing as a couple, no tax on your Social Security. If that number, if you're single is more than 25,000, or if you're a couple more than 32,000, then Social Security is taxed proportionately, depending how much over those thresholds. There. There you are. The bottom line is, at worst, only 85% of your Social Security benefit will be taxed. So 100% of your Social Security benefit is not taxed. At worst, 85. At best, nothing. And again, this is where maybe tax strategies come into play as far as keeping people's income levels below those thresholds.

And we always talk to people about the different thresholds that it comes with. And so this is just another reason why to keep as much of their taxable income below that line and looking for tax free alternatives. You know, life Insurance and Roth IRAs and municipal bonds, things like that, that aren't actually taxable.

Exactly. Exactly.

So we're going to jump into Medicare here in a second. But what else before we do that, is there anything that people need to understand about filing their benefits or what are some key principles that they should be remembering as they venture into this? This.

I think there are. There are many key principles. But. But I like to say three. Number one, know your full retirement age, because your full retirement age is kind of a magical age. It's a magical age from a couple of standpoints. Number one, it's the starting point for determining your benefits. If you take your benefits before your full retirement age, they're going to get reduced. If you take your benefits after your full retirement age, they're going to be increased automatically. A second important point about the full retirement age. If you take your Social Security before your full retirement age and continue to work, there is an earnings limit that you are allowed to earn with W2 or 1099 wages. And if you earn more than that threshold, your Social Security is going to be reduced. That earnings limit for this year, I believe, is 16,880. Now, if you're at your full retirement age or later, that earnings limit goes away. So as a result, if you take your benefit at your full retirement age, the magic of that is you can continue to work and Social Security doesn't care if you earn a million dollars. They're not going to reduce your Social Security benefit. Again, the magic of full retirement age.

Gotcha. So Medicare, I guess, goes hand in hand with this a lot of times, you know, especially with Obamacare and all the changes that are going on with that. One of the biggest concerns have coming in here is about their health care costs. It's a big variable. It's a big question mark. And I know there's been a lot of discussions about revamping things and to the date of this recording anyways, there's not a whole lot of things being changed, but there's a lot of things being discussed. But Medicare does come into that and it is a big deal for people to get to that age 65 and be able to start drawing benefits. So maybe get into that a little bit about who's actually eligible for Medicare and. And what that actually means.

Well, first of all, you are right, Brian. Medicare in general, when people reach Medicare, they generally feel better about their health insurance than before because there's a tremendous cost saving. And whenever I talk about Medicare, I always say and preface it by saying Medicare as it is today. We do not know what's going to happen down the road. But as it is today, it is a wonderful system for seniors to qualify for Medicare. The easiest way is to reach age 65, the month you turn 65. The first of the month is when you are immediately eligible for Medicare. There's another way you can qualify for Medicare, and that's if you've never worked and earned any Social Security quarters or credits, okay, but your spouse has, then you automatically qualify. So sometimes a lot of women I meet with say, well, gosh, I never worked, I was a stay at home mom. I guess I won't be eligible for Medicare. No, they're wrong. If their spouse is eligible for Medicare, they can qualify off them. A third way to qualify for Medicare is if you are on Social Security disability and you're on for two years, 24 months, the 25th month, you automatically qualify for Medicare, no matter what your age. So if you're 33 years old and you're getting a disability check for 24 months, that 25th month you are eligible for Medicare, which is a good deal for those people. People always say, well, what if I'm working past 65, do I have to sign up for Medicare? The answer is, no, you do not. Medicare becomes you're eligible for Medicare when you quit your work job and your work plan, your work health plan. Once you quit your job and you are off your employer plan, then you have another enrollment period where you can enroll in Medicare at 67, 68, 69 or whatever and pay no penalty or anything and still get the benefits.

Okay? So, and then when it comes to Medicare, there's a lot of, there's like an Alphabet soup there, there's a lot of things going on there. But basically you have the part A and the part B right? Do these options cover everything or is there other things that people need to be thinking about there?

Well, Medicare, when it was set up in 1965, had two parts. Part A covered hospital, home health, hospice and skilled nursing. Part B covered basically anything else, doctor's visits, X rays, blood tests, colonoscopies, mammograms, emergency room services, et cetera, part A and part B B. There is a cost for part A and part B, but we have paid for part A in general from our work checks. We didn't realize it when, when we were working, but the government was taking out for Medicare part A. So in general, there's no premium for Medicare part A, no monthly premium. There is a monthly premium for part B. We'll get into that in a minute. But to answer your question, Brian, Part A and Part B does not cover everything. There are gaps in that coverage. So you generally have four ways to cover the gaps. Number one, you could say, I'm going to pay out of my pocket. Well, most of us can't afford to do that, especially chancing that we might get a catastrophic illness. Number two, some companies, when you retire, will allow you to stay on the company plan. It's usually pretty pricey, but they will allow you to do that. A lot of companies won't, but that's its second option. So pay out of your pocket. Number one, stay on your work plan. Number two, most people can't do either one. So the government gives us two choices as to how to help cover the gaps. One is called a Medicare Supplement or Medigap. They mean the same thing. The other one is called Medicare Part C choice or Medicare Advantage. Those three mean the same thing. Part C choice and Medicare Advantage mean the same thing. So again, to summarize, in most cases, you have two choices to cover the gaps. Buy a Medicare supplement or buy a Medicare Advantage plan.

What about prescription drug coverage? Is that included in what you're talking about there? Is that something totally different?

Well, it's interesting because as I said, part A and part B were set up in 1965 when Medicare began. Part C came in in 1997. Part D did not come in until 2003 when President Bush inaugurated and passed through this prescription drug law. Imagine this, Brian. Before the prescription drug law was enacted in 2003, if you were in the hospital and had to take drugs or be administered a shot, part A covered it. Part A covers hospital. If you were in the doctor's office or in the emergency room and you had to take some medication or a shot or an injection, part B would cover it. But if you had to take prescription drugs at home up until 2003, there was no coverage. So President Bush did a great job in getting the prescription drug part D passed. And now Medicare supplements. If you go the route of choosing to buy a Medicare supplement, drugs cannot by law be included there. You have to buy a separate drug plan. So if this were a mathematical equation, you have part A, part B, you buy a supplement and you buy a drug plan and you've got yourself covered. If you decide to go with the Medicare Advantage plan, you have to have part A, Part B, you buy part C of Advantage plan. Advantage plans are allowed to cover drugs. And so you get a little bit of an extra benefit with an Advantage plan where drugs are incorporated into that.

I'm Guessing this isn't a one size fits all situation because like we said before, there's an Alphabet of different options. So how do people know what to do when it comes to all these options?

Well, first of all, the supplements are really confusing because the government dictates. They kind of guide the bus, if you will, with the supplements. There are 10 supplements set up by the government and its infinite wisdom or stupidity. The government named those 10 plans 10 supplements. Plan A, plan B, plan C, plan D, et cetera. Now, notice there's a part A and there's a part B and people confuse plan A and part A. So it really, you're correct. It's an Alphabet soup that's very, very confusing. So how do you figure all this out? Well, you know, there's a couple of ways. Number one, the Internet is a source. If you're familiar with the Internet and like to go through this, you know, it's confusing, but you can fight through this. As you are about to turn 65, about three months before you turn 65, you will be deluged, deluged with letters and phone calls from, from all the insurance companies who are selling the supplements and advantage plans. And that becomes a nightmare. The mail. Every day people tell me they have stacks and stacks of mail and they just throw them away. The third way is to use a reputable, reliable health insurance broker. He will sift through this information. He will talk with you. He will analyze your situation. He can advise you on which is the best route to go, a supplement or an advantage plan. He can tell you the pros and cons of each. People sometimes are afraid to use a broker because they say, well, it will cost me more money. The answer is no. It is. It is. It is not true. I myself, who turned 65, I was advised by a broker. I told the broker I wanted plan F, a supplement. And he said, well, it will cost you 165 bucks a month. Not trusting him or knowing how the system worked, I went home and I called the insurance company he recommended. I called that insurance company. I said, I want plan F. What are you going to charge me? They said, 1 65amonth. And I said, basically, how in the heck does this broker make any money? And they said, well, we don't have to call you anymore. We don't have to write to you anymore. The broker has done the job for us, and we, the insurance company will pay the broker a commission. Well, that relieved my mind tremendously. And now I use a broker, a reputable broker, who every year meets with me and tells me, rich, we need to make these changes or no, we need to keep the same plan. So I think that's the best route to go.

Absolutely. And so that's partly why you're here. I mean, we have an integrated resource network of resources that people can rely on to get the information they need. And of course, Social Security specialist and somebody that handles health insurance and Medicare insurance and they know those things inside and out and can offer them the options. Of course, we recommend they go through us to request that information. But so as we wrap up Medicare here, maybe just share. I'll just leave this open ended for you, Rich, just to say, what are some of the most common mistakes that people make, you know, when choosing Medicare?

Yeah, there are a lot of those, Brian, and I'll try to summarize briefly. Not signing up when you're supposed to is a common mistake. You'd be surprised at the number of people that forget. So that becomes important. Sign up when you're supposed to. Usually people that are turning 65 and they have quit work, that's pretty easy. It's the people that are continuing to work past age 65. And then when they quit work, there's some. Sometimes it gets lost in the translation when they sign up. So make sure you sign up when you're supposed to. Number two, don't put your Medicare plans, your medical or your drug plan or whatever on autopilot. Don't just let them go year in and year out without reevaluating them. Every year, from October 15th to December 7th of every year, there is an annual open enrollment period where people can change their plans within some parameters. There are some. Sometimes you can and sometimes you can't. But you need to look at it. Insurance companies rely on people not doing their homework. They rely on you not looking at your plan, reevaluating it every October 15th to December 7th. And if you don't do anything, guess what? You're automatically renewed in that plan. So again, don't keep your plans on autopilot. You might be able to save money by switching a drug plan. You might be able to save money by switching an Advantage plan whatever whatever. Number three, if you are in an Advantage plan, Advantage plans have networks. And if you go out of the network, you will pay much more than you would if you stay in the network. Now, supplements do not have networks. That's a big difference between the two. Supplements don't have network. You can use any provider that takes Medicare in the United States of America. But Advantage plans Have a network. So don't go out of the network. Choosing the right supplement. If you decide to go the supplement route, there are 10 of those plans. Each plan covers different gaps. Some plans cover some of the gaps, some plans cover a lot of the gaps. One plan covers all the gaps. Some plans cover the gaps not at 100%, at 50%. So again, choosing the right Medigap plan, if you go that route is important. And that's where you and and people like yourself and brokers can help advise clients making financial moves that will alter your part B premium, your monthly premium. Remember I said part A, there's no monthly premium, but part B, there's a monthly premium. And I didn't say at the time, but I'm saying it now. That monthly premium is based on your modified adjusted gross income. So by you taking money out of an IRA or taking money out of a 401k, you are in that given year raising your adjusted gross income. And hence you might just fall into the trap of raising your part B premium. Not a dollar or two, but significantly. So it's very important for people to really trust their financial advisor to look into these matters and explain these issues to people. So again, making financial moves after you are on Medicare that might change and force you into a higher part B bracket is really important. Not knowing health savings account rules. Medicare has really stringent rules regarding health savings account. Basically, once you go on Medicare, you got to drop contributing to a health savings account. But again, this is where financial advisors can really help people out. And I'm sure, Brian, I know you do that too.

Absolutely. And so what all this just reminds me of and reminds all of our listeners is that, you know, looking at your entire financial picture is critical because they're not just one thing. You can't just look at one thing. Whenever you're looking at a retirement plan or any financial plan at that, there's so many things to consider and so many things to look out for, because it all overlaps.

Yeah, you are, you are correct about that. And as you mentioned earlier, the three buckets, taxable, tax free and are tax free, and are tax deferred and tax free, are really crucial to understand how each of those buckets function. And this is a complete integration of all financial aspects here. Medicare, Social Security, 401ks, IRAs, Health Savings Account, they're all interrelated and very complicated. And really careful study and care has to be taken in dealing with these.

Absolutely. And that's why we bring people like you in who know this stuff inside and out to help us. You know, me being in the business almost 25 years now, still don't care to be anyway a specialist in these areas when we have folks like yourself. So there is a lot to know, there's a lot to consider. There's a lot of things people don't know. And what's bad, I guess is the rules are changing at times. And so we do appreciate your time today. We really value your opinion on all this and sharing your expertise and your knowledge with us. So I appreciate your time today.

Rich thank you. Brian.

Retirement planning is like a puzzle. There are many disconnected pieces that require a big picture to assemble. Too often I hear about people making decisions without consideration for their entire financial picture. When you make a decision about your Social Security, your pension 401k or other assets, you cannot simply look at that decision as a standalone election. You have to begin with understanding your cash flow, the effects of inflation, your tax exposure before even considering the decision about these other things. If you would like to discuss any of this in more detail, give me a call at 6362-965255-63629-65225. That concludes today's podcast. In our next podcast we will begin to discuss cash flow and why it is the most important part of your financial planning. To understand you won't want to miss this episode, so be looking for this in the next couple of weeks. I'm Brian Scribonia and thank you for listening to the Common Sense Financial Podcast.

Securities and Advisory Services offer through National Planning Corporation, a member of FINRA and sipc, a registered investment advisor. Scribonia Financial Group, LLC and NPC are separate and unrelated to companies. Information provided is for illustrative purposes only and does not constitute investment, tax or legal advice. Information has been obtained from sources that are deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither MPC nor the host of this show or Scribonia Financial Group, LLC accept any liability for the use of the information discussed. Consult with a qualified financial, legal or tax professional prior to taking any action.