There are 4 distinct Rules of Retirement from the federal government that will alter the relationship between your retirement savings and both your Medicare coverage and your Social Security benefits.
These 4 Rules of Retirement are:
1. You have a mandatory expense in retirement.
According to Social Security’s Program Operations Manual System (POMS) for you to receive any and Social Security Security benefits you must also accept Medicare Part A when eligible.
If you do not have creditable health coverage through an employer and or spouse’s employer and you do NOT accept Medicare Part A you will forfeit all current, future and even past Social Security benefits.
Unfortunately, the other parts of Medicare, Parts B & D, come with late enrollment penalties that are perpetual and compounding.
The Affordable Care Act also mandates that every person must also have some form of “credible” health coverage or face the possible penalty of either a dollar amount or percentage of overall income.
2. Your Income determines how much you will pay for your Medicare.
Under Medicare’s Income Related Adjustment Amount (IRMAA) if you have too much income for the year you will receive a surcharge on top of your Part B and Part D premiums.
Currently, the income thresholds begin at $85,000 for individuals and $170,000 for couples while the surcharges start at 40% and skyrocket to 360%.
3. Social Security automatically pays for the bulk of your Medicare Premiums.
Social Security’s POMS states “Medicare Part B premiums must be deducted from Social Security benefits if the monthly benefit covers the deduction.”
Part D Premiums are optional.
Something to think about:
- Medicare Premiums, according to the government, will be increasing by at least 5.50% each year.
- At the same time the Social Security cost-of-living adjustment (COLA) will only increase by 2.4%.
- In retirement your Social Security benefit will never increase and if you reach IRMAA your Social Security benefit will in fact decrease!
Here is a chart from the Congressional Budget Office (CBO) depicting how Medicare, Social Security and the U.S. Budget will behave over of the next 60 years.
Notice Medicare (in light blue) increases while both Social Security (purplish/blue) and the Budget (blue) stay flat?
For more information on how Medicare costs will impact your Social Security please see our post “The impact of health costs on Social Security” (we need the hits).
4. Income for IRMAA is practically everything that you have for retirement.
When it comes to what counts as income towards IRMAA this list is long as practically everything counts, but to give you an idea Social Security defines IRMAA income as:
“Modified Adjusted Gross Income (MAGI) is the sum of your adjusted gross income (AGI) (found on line 11 of the Internal Revenue Service (IRS) tax filing form 1040), plus tax-exempt interest income (line 2a of IRS Form 1040).
To calculate your MAGI simply look at your 2023 IRS form 1040 and add lines 2a and 11. This will give you your income.
So what are some things that count as income towards IRMAA:
| All Wages | Traditional 401(k) Distributions |
| Taxable Social Security | Traditional 403(b) Distributions |
| All Interest | Traditional SEP Distributions |
| Pension Income | Qualified Annuity Income |
| Rental Income | Keough Accounts |
| Capital Gains | 457 Accounts |
| All Dividends | Alimony |
What does not income and the list is very short:
- Income from Roth Accounts
- Life Insurance
- Specific Non-Qualified or Roth Annuities.
- 401(h) plans.
- Home Equity withdrawn from a primary residency (e.g. via reverse mortgage).
- Health Savings Accounts (HSA’s).
For a comprehensive list of what does and does not count towards IRMAA please click here.
Conclusion to the 4 Rules of Retirement
- You have a mandatory expense in retirement which is Medicare.
- If you don’t enroll into Medicare and you do not have creditable health coverage you will forfeit your Social Security benefit and have little access to the healthcare system.
- The amount of your income will determine what you pay for Medicare.
- The costs of Medicare reduce your Social Security benefits
What the future may hold for retirees and quite possibly the financial industry:
As Medicare costs increase people in retirement will realize that their Social Security benefit is not keeping up.
In turn they will withdraw more money each year from savings and this may propel them into IRMAA.
As IRMAA increases their Medicare premiums even higher they will realize that they have to withdraw even more from savings.
Even if people decide to cut back and not withdraw money, eventually they will have to take their required minimum distributions (RMD’s) from their Traditional 401(k)’s and Traditional IRA’s.
These RMD’s will eventually force people into IRMAA and the cycle will continue.
The end result will be a point in retirement where savings will be depleted well before they originally planned for, thus destroying their plans.
For those in the financial industry, because their clients never planned for these 4 Rules of Retirement and have to take more money out each year the assets they manage will decrease each year too.
Your health is your greatest asset, the time to plan for it is today.
For more information please contact Dan McGrath by email at dan@irmaacertifiedplanner.com
