The new year has brought some new math for anyone running their retirement planning numbers.
Social Security checks are a bit higher this month, thanks to the annual cost-of-living adjustment (COLA) – but higher Medicare Part B premiums will take a bite out of the increase. Meanwhile, new protections from high prescription drug out-of-pocket costs are in place, along with some new rules governing required minimum distributions from retirement accounts. And we have reached a milestone on the age when you can claim your full Social Security benefit.
THE COLA KICKS IN
The annual Social Security COLA is landing in bank accounts this month. The inflation adjustment is pegged to changes in consumer prices in the broad economy. With inflation cooling off, the 2024 COLA is 3.2%, much lower than the historic 8.7% 2023 adjustment, but still ahead of the historical average of 2.6%.
Inflation is an ever-present concern for retirees – not so much because of year-to-year fluctuations like we have just experienced, but due to the way higher prices compound and erode spending power over the course of retirement.
The Social Security COLA provides critical protection, although it is most meaningful for middle- and lower-income retirees. The program replaces a higher share of their pre-retirement income than it does for more affluent retirees. That means a greater share of their retirement income will be protected by the COLA.
MEDICARE PREMIUMS JUMP
The standard monthly premium for Medicare Part B (which covers outpatient services) has been volatile over the past few years, reflecting the impact of the pandemic and the growing cost of expensive drugs administered by healthcare providers.
This year, the Part B premium jumped by a hefty 5.9%, to $174.70. If you receive both Medicare and Social Security benefits, the Part B premium is deducted from your check, so the dollar amount of the increase impacts your net COLA. This year’s premium increase amounts to $9.80 per month, and the impact is felt most sharply by people who have modest or low benefits. For example, for someone with a monthly benefit of $1,000, the net COLA this year is just 2.2%. But if your benefit is $3,500, you will hardly notice the reduction – your net increase is 2.9%
NEW PRESCRIPTION DRUG COST PROTECTIONS
For the first time, seniors with Medicare Part D prescription drug coverage will be protected by a cap on total out-of-pocket costs. Provisions of the Inflation Reduction Act (IRA), signed into law in 2022 by President Joe Biden, will effectively act as an out-of-pocket cap of $3,300 this year. In 2025, an across-the-board $2,000 annual cap on out-of-pocket costs for drugs under Medicare Part D will take effect.
These protections will immediately help patients taking expensive drugs for conditions such as cancer. Last year, patients taking drugs such as Lynparza, Ibrance and Xtandi faced annual out-of-pocket costs around $12,000, according to KFF, opens new tab, a nonprofit organization focused on health policy.
NEW RULES FOR REQUIRED MINIMUM DISTRIBUTIONS
Have you reached the age yet when you must start drawing down funds from your tax-deferred savings? Required Minimum Distributions (RMDs) have been a moving target lately. The U.S. Congress bumped up the starting age for RMDs in 2020 to 72 from 70, and raised it again last year, to 73. And the minimum age will continue to rise, gradually, to 75 by 2033. The requirement dates vary according to your age, so consult this IRS page, opens new tab to understand your personal RMD deadlines.
Most financial services firms can calculate RMDs for you, but the penalty for failing to take them is ultimately yours. The penalty for failing to take an RMD on time is 25% of the amount by which your withdrawal fell short of the required minimum.
The exceptions for RMDs include 401(k) accounts at a firm where you still work, and Roth IRAs. New for this year: Roth(k) accounts held within a workplace plan also are exempted from RMDs.
THE HIGHER RETIREMENT AGE: WE’RE ALMOST THERE
The Full Retirement Age (FRA), opens new tab is the point when you can claim Social Security and receive 100% of the benefit you have earned. It is a critical feature of the program, since you can claim a retirement benefit as early as 62, or wait as late as age 70; your monthly benefit amount will be higher – or lower – depending on your timing.
Reforms signed into law back in 1983 have been gradually increasing the FRA from 65 to 67. The idea was to lift the FRA over time in order to avoid any sudden impact on people close to retirement. But the change is now nearly complete; the FRA is 67 for workers born during or after 1960. For them, the higher FRA is equivalent to an across-the-board benefit cut of roughly 13%.
Are you turning 65 this year? Happy birthday – your FRA is 66 and 10 months.
The opinions expressed here are those of the author, a columnist for Reuters.
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