Power Up Wealth podcast – Social Security in 2023 – Episode 35 transcript:
James Derrick 0:00
In 2023, Social Security benefits are going to increase at a historic rate. I am James Derrick, and joining me today to discuss this is Sharla Jessop, President of Smedley Financial Services.
Sharla Jessop 0:22
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
James Derrick 0:46
Sharla, thank you for joining me today.
Sharla Jessop 0:47
Thanks, James.
James Derrick 0:49
Sharla Jessop has a CFP designation, and she is President of Smedley Financial Services. And she’s here to talk about Social Security benefits, the impact on taxes and Medicare, and all kinds of things. Sharla, what do people need to know about the increase itself?
Sharla Jessop 1:04
You know, I think people will just take it in stride. I think that I worry that they’ll just take it in stride, like, here’s more money, but it’s a huge difference for someone who would be earning $2,500 in a monthly benefit, it’s an increase of about $217 a month or $2,600 a year. I think it’s really important that people take that excess, and really make it count, really think about what they’re going to do, and the impact it can have on their financial situation.
James Derrick 1:30
I like that. Be deliberate with what you’re going to do. And don’t just let it go into the bank account and get spent. What would you recommend people do with it?
Sharla Jessop 1:39
Well, there’s several different things. So first one, obviously, is we’ve had a buildup of cash over the years. People have been spending that down with inflation. Building up an emergency fund is one thing that’s really important. And sometimes retirees don’t do that as often because they’re living on a fixed income. So they don’t have a lot of excess, they don’t get a lot of pay increases. So building up that first line of defense, which is your emergency savings, would be really valuable to those people long term.
James Derrick 2:07
That’s a great idea. In fact, now some of this is going to be swallowed up with inflation. I mean, and that is the reason why they’re getting this cost of living increase. But you’re saying take a portion of it and build up excess savings.
Sharla Jessop 2:19
Right. Don’t assume that this excess money is available to spend. Still manage your spending, like everyone else who’s managing their spending, dealing with inflation, regardless of whether you’re getting a cost of living increase. We’re all dealing with inflation. Still manage that spending, but put as much aside as you can. And then as a second note, we’ve also seen a lot of debt increase over the past several years. And with interest rates rising, this is a great time to maybe focus on getting out of debt, paying that debt down, especially if you have variable interest rates, home equity loans, HELOCs, those types of things, see if we can get those paid off.
James Derrick 2:58
Great suggestion. Now, this increase also gets counted as income. Is that right? What is the impact going to be on taxes?
Sharla Jessop 3:06
It is counted as income. But there are some things people can do to help manage their own tax liabilities. A lot of people are receiving Social Security plus they have pensions, and they’re taking money out of retirement accounts, which is also counted as earned income. If they’re taking an excess out of their retirement account, more than just the required distributions, for instance, they can reduce that down and offset that with this cost of living increase. And that might reduce what they’re going to pay taxes on as far as Social Security, or it will reduce the amount of their Social Security percentage that is taxable.
James Derrick 3:43
All right, what about the impact on Medicare and other benefit expenses?
Sharla Jessop 3:48
Medicare is tied to income. And with the changes that we have coming up next year. One of the things that is changing is the limit for IRMAA, or the Income Related Monthly Adjustment Amount, abbreviated IRMAA. And that is what most Medicare recipients may not be aware of. If you hit IRMAA, that means that you’re going to pay more for your Medicare Part B premiums and your Part D premiums, which is prescription drugs. And there’s a two-year look back. So this really impacts people who are going to be receiving a cost of living increase, but also those who may have had some big sales or items that increased income in the last few years. Maybe they sold a rental property, or maybe they sold a business or had a large capital gain. They had to claim. Those things are going to impact what they’re paid as far as premiums or what their increase in premiums is going to be as far as Medicare. Another thing is when to take Social Security because a lot of people have wondered with this cost of living increase if they should take Social Security benefits this year and 2022 so they can benefit in 2023 And the reality is, that is all calculated into their estimate, and they will receive it even if they delay their benefits. And here’s some reasons why they might want to delay benefits if they’re not taking them. If you are between age 62 and your full retirement age, and you’re still working, that think that you’re going to take Social Security, you’re going to be subjected to a tax or paying back a portion of what you earn, one in every $2 that you earn, will go back to Social Security. They call that the income limit while you’re receiving Social Security. And most you might think, well, why would somebody take Social Security if they are retiring, or going to still work? We’ve seen a large exodus from the workforce and retirees throughout the pandemic. Some of them didn’t want to retire fully. And a lot of those have come back into the workforce working part-time as consultants or for other businesses, so they have earned income, but they’ve already taken their Social Security or claimed Social Security benefits.
James Derrick 6:00
Okay, that makes a lot of sense. And so then your advice would be not to change your, your choice on when to take Social Security, just continue with whatever you had planned before.
Sharla Jessop 6:12
Right. If you’ve already taken Social Security, you can’t change that. But if you are, have retired not taking Social Security yet, and you think you’re still going to work, delay Social Security, if you can, so that you’re not paying that penalty.
James Derrick 6:24
Yeah and this 8.7% increase is coming this year, but it probably won’t be this high the year after that, or the year after that.
Sharla Jessop 6:33
I hope not. Because that means we’re still fighting really high inflation. There have been years in the past where we’ve had Social Security increases of 7 and 8%, maybe two years in a row. But you have to remember last year, we had a for 2022, we had a large cost of living increase for Social Security as well. So we’ve really had two years. And next year, I don’t anticipate we’ll have a huge social security increase.
James Derrick 6:57
I don’t either. I don’t think the Federal Reserve is would be doing their job if it happened with a third year in a row. What about all of these things? So Social Security’s going up by an amount related to inflation? IRMAA is going up at an amount related to inflation, is it all a wash?
Sharla Jessop 7:15
No, it’s not an actual wash, because there are expenses that you can manage would be inflationary that maybe you don’t need to purchase. For instance you might not do need to buy a vehicle. We know vehicles are high. You might not need to travel on an airplane. I mean, there’s some ways that you can manage in life and reduce the exposure to inflation or some of the costs.
James Derrick 7:37
Well put. Anything else you’d want to leave with our listeners?
Sharla Jessop 7:40
Yes, some other things they might consider for tax planning strategies are managing qualified charitable distributions. It’s a way to get money out of your IRA, it doesn’t count as income on your taxes. So it doesn’t impact what you’re going to pay as far as tax on your Social Security. And it doesn’t affect your Medicare Part B premiums. That’s money that comes out of your IRA, goes directly to a qualified charity. You don’t claim it as income, you’re not impacted Social Security or Medicare wise because of it.
James Derrick 8:10
This is an incredible tool. And I think it’s important if you have done one of these QCDs, to make sure you tell your tax preparer, that it was a QCD so that they can file your taxes correctly.
Sharla Jessop 8:23
That’s right. Unfortunately, we’ve seen a lot of taxes that have had to be amended because a QCD was handled as a charitable deduction, rather than a qualified charitable distribution, which is completely different.
James Derrick 8:35
Yeah a QCD is much better.
Sharla Jessop 8:37
Right? For many reasons.
James Derrick 8:39
You want to get that right. Thank you Sharla for joining us today.
Sharla Jessop 8:42
Thanks, James.
Shane Thomas 8:48
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn.
The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
