Few programs impact your retirement quite like Social Security and Medicare, making any changes crucial financial planning information. The Social Security Administration (SSA) recently communicated updates and expectations for beneficiaries heading into 2021.

Today, our team will outline the top changes that could influence your plan. 

Beneficiaries can expect a raise.

Most retirement income channels don’t account for inflation, but Social Security institutes a cost of living adjustment (COLA)—an adjustment that seeks to counteract the impact of inflation. The COLA for 2021 is 1.3%. 

These adjustments tend to coincide with data from the consumer price index for wage earners and clerical workers (CPI-W) over a certain period like the difference between the third quarter of 2019 and the third quarter of 2020, for example. Since COLA is tied to inflation and the CPI-W, the amount fluctuates each year, and some years doesn’t happen at all. 

While 1.3% is a modest raise, it results in about an extra $20 per check or $1,543 for the average retired worker. The maximum benefit for someone retiring at full retirement age has also increased by $137 to $3,148 a month.

Additionally, those collecting disability benefits can expect a larger check, about $16 more on average. 

Working retirees can earn more money penalty-free.

While you can work and collect Social Security benefits, the SSA puts a cap on your earnings before your benefits are penalized, known as the earnings test limit. In 2020, retirees saw a reduction of $1 for every $2 earned above $18,240. That amount increases to $18,960 for 2021, which comes out to an extra $60 per month or a 4% raise. 

Keep in mind that the rules change in the year you reach your full retirement age. Under these circumstances, the earnings limit rises to $50,520, a distinct increase from the $48,600 in 2020. Should you exceed that threshold, you can expect $1 for every $3 over the limit to be withheld. 

The earnings test limit doesn’t apply to retirees who have reached full retirement age. As soon as you hit your number, you can work as much as you’d like without worrying about affecting your benefits.

Maximum taxable earnings are on the rise. 

Social Security is funded through a payroll tax, 12.4% on eligible wages. This amount is often split between an employer and employees (6.2% each) except in the case of self-employed workers who foot the entire bill themselves. 

The payroll tax is only subject to eligible wages, and that amount increases each year. For 2021, the maximum amount of taxable earnings jumps to $142,800, an over $5,000 increase from last year. This just means that more of your earnings are subject to payroll tax. 

Work credits cost more.

One Social Security eligibility requirement is accruing enough work credits, which, for most beneficiaries, is 40. You can earn up to 4 credits in a year, translating to at least 10 years in the workforce. Work credits are tied to earnings, and the amount of earnings needed to earn a quarter of coverage in 2021 is $1,470 per credit.

The news about Medicare Part B premiums.

Social Security and Medicare tend to go hand in hand. Many people collecting benefits opt to have their Part B premiums withheld from their Social Security checks. A significant hike in premiums could easily neutralize the COLA for the year, but the Part B premium didn’t jump as high as initially expected, $148.50 for 2021, an increase of just $3.90. This is good news for many beneficiaries. 

Keep in mind that Part B premiums are tied to your taxable income, meaning you could pay more if you make above a certain threshold. Should your modified adjusted gross income exceed that set amount, you’ll be responsible for paying the standard premium plus an income-related monthly adjustment amount (IRMMA). Medicare IRMMA begins for those making over $88,000 and the highest payment is for those making over $500,000 ($504.90 per month).

Will these changes impact you?

Our team is here to help you craft a retirement plan that supports your goals, dreams, and vision for the future. Both Social Security and Medicare play a vital role in your income and lifestyle planning. Understanding the changes to these systems will help us and you make intentional adjustments to your plan to make the most of your retirement. 

Would you like to talk more about how these updates could affect your income plan for 2021? Schedule a call with our team today.