Social Security and Medicare basics

For most of us, Social Security is the bedrock of retirement income. And Medicare is likely to be your primary source of health coverage. But when can you claim Social Security? And exactly what is Medicare? Understanding how and when to start taking advantage of these programs can help you maximize your benefits—and positively impact your retirement lifestyle.
Though the two programs are separate, Social Security works closely with Medicare to enroll people who are 65 and older, provide information and collect premiums.

Social Security basics

Who can claim Social Security?
There are various types of Social Security benefits, but here’s how to qualify for the retirement benefits that could make up a third of your monthly income:
  • You are at least 62 years old;
  • You have worked at least 10 full years (and they don’t need to be consecutive as long as you have earned the requisite 40 credits), and Social Security taxes were withheld; or
  • Your spouse or ex-spouse worked 10+ years, and you qualify for benefits based on his or her record.
     
Keep in mind that Social Security benefits may also be available for children, spouses, former spouses or people with disabilities. And if a loved one dies, certain family members (widows or widowers, unmarried children and dependent parents) may qualify for survivor benefits. To learn more about qualifying for any of these benefits, you should consult a tax professional or your financial advisor to see how it applies to your own situation.
When can you claim Social Security?
The right age to claim all depends on you. Nearly half of Americans file for Social Security as soon as possible, at age 62. It’s a move that could drastically reduce the total amount you could otherwise receive over your lifetime, and over the lifetime of a surviving spouse. This is an especially important consideration for women, who tend to live longer and earn less than men.
Here’s why timing is everything:1
Early claiming: You can collect a Social Security retirement benefit as early as age 62. But if you do claim early, your benefits will be reduced by as much as 25% to 30% depending on when you were born. For example, if you are eligible for $1,000 a month at full retirement age, you might get only $750 a month at age 62. The reduction in benefits due to early filing will be less for each year you delay your filing between age 62 and your “full retirement age.”
Full retirement age: What does the Social Security Administration mean when it refers to your “full retirement age?” It’s the age at which you’re able to claim full benefits, and it varies based on the year you were born. It’s age 66 for people born from 1943 to 1954, and it gradually increases to 67 for those born in 1960 or later.
Delayed claiming: If you wait to file for Social Security until after your full retirement age, you can increase the size of your monthly benefits by 24% to 32%, depending on your full retirement age. But after age 70, there’s no increase in the size of the monthly benefit if you delay your filing. So it doesn’t make sense to delay claiming beyond your 70th birthday.
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More factors: The right age to claim also depends on your work plans in retirement, your health, and the rest of your retirement income. Delaying a claim for as long as possible could make sense for some people, but there are cases where early retirement is the better option.
Claiming before your full retirement age reduces the size of your monthly benefit, but could be a good choice if:
  • Your life expectancy is shorter;
  • You need the income for immediate cash flow;
  • Your family members (such as a disabled child) can qualify for additional benefits; or
  • To enhance your benefits as a couple.
     
Claiming Social Security after your full retirement age, which increases monthly benefits, could be a better option if:
  • Your life expectancy is longer;
  • You are still working;
  • Benefits for a surviving spouse need to be maximized; or
  • You are looking for tax savings options and a way to help retirement investments last longer.
     
Three common Social Security strategies
Get the timing right, and you could potentially boost monthly benefits for yourself and a spouse or dependent. Here are three strategies to consider:
1. Delayed retirement: Waiting to claim Social Security benefits based on your own work record provides what are called “delayed retirement credits” for each year you wait past your full retirement age. If you were born in 1943 or later, you can increase your benefit by up to 8% per year for each year you delay your claim after your full retirement age, up to age 70.
Let’s say you were born in 1960 or later. If you delay your Social Security until age 70, your full retirement benefit would be multiplied by 124%. For example: If you were set to receive $2,000 a month at full retirement age, but you delay to age 70, you would get about $2,480 a month instead.
One note: Even if you delay your Social Security claim, make sure you still sign up for Medicare at age 65 if you need coverage. (More on that below.)
2. File and suspend: With this strategy, you could file for Social Security at your full retirement age, but then “suspend” the claim to accrue delayed retirement credits. This strategy used to be more commonly used by married couples, but has been eliminated. However, it may still make sense for individuals in the following situations:
First, if you file early for your Social Security retirement benefit, and then change your mind or no longer need it. Suspending the claim can increase the size of your monthly payments in the future and can help offset some of the reduction to your benefit due to early filing.
Second, you expect your income to increase, and you don’t want your Social Security benefit to be taxed. When your annual income exceeds certain levels, a portion of you Social Security could be subject to income tax. (More on that below.) So, if your income rises unexpectedly, suspending Social Security for that year might help you lower your tax bill.
3. Restricted filing: Married couples should approach the timing of each spouse’s claim as a team strategy, and take advantage of both spousal and individual benefits as a way to maximize their income. One popular strategy used by couples, filing for a spousal benefit with a restricted application, lets one spouse get the benefit from the other’s record while delaying his or her own benefit. However, due to changes in the law, this strategy is no longer available for people who were born on or after January 2, 1954.
What if you are divorced?
If you are divorced from a worker who is entitled to a Social Security retirement benefit, and your marriage lasted at least 10 years, you may have the opportunity to claim benefits on your ex-spouse’s record—even if he or she remarried.
  • If you are divorced, you can receive spousal benefits on your ex-spouse’s record if you are unmarried, at least 62 years old, and the benefit you’re entitled to is less than what you could get through your own record.
  • If your ex-spouse dies, you may be entitled to a survivor’s benefit on his or her record. You can claim as early as age 60 for reduced benefits, or receive full benefits at your full retirement age. And if you remarry after age 60, there’s no impact on your eligibility.
     
Are Social Security benefits taxed?
Yes, if your income reaches certain levels (see the chart below). Generally, the more you make, the more your benefits could be taxed. It’s important that you keep taxes in mind when planning:
  • When to claim Social Security;
  • Whether (and how much) to work in retirement; and
  • When to make withdrawals from retirement savings accounts.
     
Taxable Income Table
Source: Social Security https://www.ssa.gov/planners/taxes.html , August 2020
As you can see, it’s important to think about Social Security as part of your retirement income plan. Once you have a sense of the guaranteed monthly benefits you will get through Social Security, you can build them into the “income floor” that you can use to cover essential expenses in retirement.What if you have a gap in guaranteed lifetime income? You can consider filling it by purchasing a fixed annuity, one of the few sources of guaranteed lifetime income beyond Social Security.

Medicare basics

Who can claim Medicare benefits?
Medicare is the federal health insurance program for people who are 65 or older, as well as for people of all ages with certain disabilities. Medicare will help with hospitalization costs and doctor visits, but keep in mind you’ll probably need supplemental coverage to help pay for other healthcare-related expenses. It’s important to understand what’s covered under the different parts of Medicare, and how it fits into your long-term plan.
Here’s more on who qualifies for Medicare:
  • If you worked and paid payroll taxes for at least 10 years, you qualify for Medicare at age 65.
  • Individuals younger than 65 with disabilities may also qualify.
  • You must also be a U.S. citizen or permanent legal resident (or married to one who has paid Social Security taxes for at least 10 years).
     
Though Medicare goes a long way in helping meet healthcare expenses, there may be deductibles, copays and limits, as with many health plans. Additionally, Medicare Parts B and D (more below) charge monthly premiums based on your annual taxable income. And premiums for Medicare supplement policies vary widely by policy type and state.
When can I claim Medicare benefits?
If you are not already collecting Social Security at 65, you must enroll for Medicare around your 65th birthday if you want Medicare health coverage—and it’s a good idea to start the process three months before the big date. If you don’t enroll when you turn 65, it could result in penalties, so make sure you understand your enrollment deadlines and coverage options. There’s no need to re-enroll each year, but you can review and make changes to your plan.
How do I enroll in Medicare?
If you are not enrolled automatically, you may sign up for Medicare Parts A and B during the following time periods:
  • Initial Enrollment Period: When you are first eligible for Medicare, you have a seven-month period to sign up. This seven-month period begins three months before your 65th birthday, includes the month you turn 65, and ends three months after you turn 65.
  • General Enrollment Period: If you miss your Initial Enrollment Period, you can sign up from January 1 through March 31 of each year. Your coverage would then begin July 1. Late enrollment may result in your having to pay a higher premium.
  • Special Enrollment Period: If you or your spouse (or family member if you are disabled) is currently working and covered by a health insurance through an employer or union, you will have a Special Enrollment Period when your coverage ends.
     
What if I keep working when I turn 65?
If you or your spouse (or family member if you are disabled) is currently working and covered by health insurance through an employer or union, you will be eligible for the Special Enrollment Period described above when that coverage ends.
The ABCs of Medicare
A variety of options let you tailor Medicare to your needs.
Medicare Parts A and B together form what’s known as traditional Medicare. Parts C and D can increase the amount of your coverage or reduce costs.
Additionally it’s important to note what services are covered by each in terms of your personal health needs. For example, some plans cover only limited dental, vision and long-term care needs.
The following brief descriptions outline basic costs and coverage provided by Medicare Parts A through D:
  • Part A is hospital coverage. It pays for inpatient hospital and nursing home care, home healthcare services and hospice care. There is an annual deductible ($1,408 in 2020) that is adjusted each year. Anyone who has worked for at least 10 years and paid payroll taxes qualifies for Part A, and people who do not qualify have the option to purchase Part A benefits.
  • Part B is medical insurance. It pays for doctor visits, routine exams and other services and supplies not covered by Part A. There is a monthly premium for Part B ($144.60 in 2020, or higher, depending on your income). It’s typically deducted from your Social Security benefits, if you are already receiving Social Security. There is also an annual Part B deductible, which is $198 per year in 2020. If you aren’t already receiving Social Security, this will be charged to you as a separate premium.
  • Part C plans are also known as Medicare Advantage plans. These are federally approved policies you can purchase from private insurers as an alternative to traditional Medicare Parts A and B Advantage plans offer, at minimum, the same coverage offered by traditional Medicare, as well as some additional benefits such as vision, hearing, dental or drug coverage. Most have low to no deductibles, and monthly premiums depend on the type of plan you choose.
  • Part D is prescription drug coverage that’s federally approved and offered through private insurers, with some plans offering enhanced benefits and options. Part D plans are set up to share the cost of drugs until you reach your annual limit. You can add Part D coverage to traditional Medicare or a Part C Medicare Advantage plan, although some Medicare Advantage plans already include prescription coverage. Monthly premiums vary by plan, but it’s typically more cost effective to enroll as soon as you are eligible for Medicare. Otherwise, your premiums may be higher, and you may pay a penalty.
     
Aside from Medicare, you may want to consider supplemental insurance, also known as Medigap coverage. Offered by private insurers, these plans are designed to help cover medical expenses that traditional Medicare does not. Anyone enrolled in Parts A and B is eligible to enroll in a Medigap plan.
Medicare publishes a guide every year with more information. Put it at the top of your must-read list when you turn 64 years old—it’s an investment in your future.
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1 Source: Social Security Resource Center, AARP, 2018
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