Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Why Social Security, Medicare Are Critical Even for Wealthy Clients: Advisors

Your article was successfully shared with the contacts you provided.

What You Need to Know

  • In a speech on Tuesday, President Joe Biden highlighted a reduction in Medicare premiums and suggested revenue from the new minimum tax on large corporate profits could be used to shore up Social Security.
  • Medicare premiums, which increase with income, are an important part of retirement income planning.
  • When to claim Social Security is another important topic for clients of all income levels.

On Tuesday, President Joe Biden offered an address to the nation focused on the theme of protecting and expanding Social Security and lowering prescription drug prices and premiums for Medicare beneficiaries.

With Social Security and Medicare in the news, financial planners can expect to field questions and concerns from their clients about what these developments could mean for their retirement planning efforts. These are important topics even for high-net-worth clients, advisors said.

Among the key policy updates marked by the president is a reduction in the Medicare Part B premiums expected for 2023, which he called excellent news for seniors and people with disabilities who receive Medicare. As the president pointed out, many people in these groups see these premiums deducted directly from their Social Security payments, meaning many Americans will see a modest “raise” in their overall retirement paycheck next year.

As noted in a statement shared with ThinkAdvisor after Biden’s speech by Social Security Works, a nonprofit organization that advocates for expanding Social Security and Medicare, these developments mean Medicare beneficiaries will now get to keep all of next year’s Social Security cost-of-living adjustment, which could be the biggest since 1981. According to the organization, in past years, rising Medicare premiums tended to consume most or all of the annual COLA for many beneficiaries.

Biden’s speech further highlighted the recent passage of the Inflation Reduction Act and its provision giving the Medicare program the power to negotiate lower prices on key prescription drugs.

This development is also celebrated in the statement from Social Security Works, which notes that Democratic and Republican lawmakers in Congress have demonstrated markedly different perspectives about the treatment of the key federal benefit programs, and that the issue is likely to be one of many key factors influencing voters’ decisions in November’s midterm elections.

Turning away from the specifics of Medicare reforms, Biden sought to link the issues of Social Security stability and the raising of the minimum tax rate applying to the largest and most successful corporations operating in the United States.

He noted that the Inflation Reduction Act, among its many provisions, reestablished a 15% minimum corporate tax rate for entities making more than $1 billion in annual profits. According to estimates previously published by the Joint Committee on Taxation, this increase would raise more than $300 billion in additional revenue over a 10‑year budget window.

During his Tuesday speech and in previous remarks offered by the president and his key aides, Biden has pushed the notion that these revenues can be used, at least in part, to shore up the Social Security trust funds, which face a “depletion date” of 2034. At that time, the funds will be able to pay 77% of pledged benefits, according to the latest Social Security Trustees report.

Speech Takeaways for Financial Planners

Nick Bunio, a financial planner with Retirement Wealth Advisors who specializes in retirement planning for those 50 and older, says Medicare and Social Security planning are critical topics for his clients — even those with substantial assets, for whom shifts in federal entitlement benefits are not “make or break” issues.

“Medicare and Social Security are huge even for wealth management clients, especially how Medicare pays for 80% of the cost [for most outpatient care and services],” he wrote in response to an inquiry from ThinkAdvisor. “That’s huge.”

Bunio said a key element of retirement planning ties to the fact that the higher a client’s income is across required minimum distributions, individual retirement accounts, pension income and 401(k) withdrawals, the more Medicare charges for Part B premiums. For the highest retirement income earners, the final rate can be up to 3.4 times the standard rate, Bunio points out.

“So, planning around that alone is a major issue for my clients,” he said. “As for planning for drug costs, that’s coming from Medicare Part D.”

Bunio noted that, because Part D benefits are provided via private insurers and not in a uniform way directly by the federal government, this is a highly personal decision for each client, based on their health, income and other key variables.

“What are the drugs they need? How much will one company cover over another?” he asked. “A lot of this is very personal, yet very critical even for those who have $5 million or more in assets.”

Kevin Brady, a financial planner and vice president at Wealthspire, agrees that Social Security and Medicare optimization are a key part of the planning process for all types of clients.

“Most of our clients are increasingly aware that delaying the start of Social Security retirement benefits through age 70 will increase the future benefit received. We typically frame this as a ‘guaranteed’ return of 8% for each year delayed that annually adjusts with inflation thereafter — a rarity to find among pensions,” he wrote to ThinkAdvisor.

“So, to the extent the client is in good health, has longevity, wants to guarantee the highest benefit amount for their spouse, and does not need the funds, we discuss waiting to claim until 70 if possible, and that it is okay if portfolio withdrawals are larger during those in-between years.”

Occasionally, Brady’s approach also includes discussion about a lower-earning spouse claiming at his or her full retirement age rather than age 70, while their higher-earning partner continues to delay.

“This can be a solid strategy and psychologically beneficial, allowing the couple to receive ‘some’ income now,” Brady explained. “Medicare tends to have less of an impact on retiree spending plans, but we do discuss it in that context since the Part B premium is deducted from the retiree’s Social Security benefit, and the Part B premium is influenced by the retiree’s income.”

On this second point, the prior-year modified adjusted gross income of the retiree will dictate the amount of Part B premiums he or she is assessed, Brady noted. This becomes relevant for annual tax planning and in determining if a Roth conversion makes sense — and how much is prudent to do.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.