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Thank you.
Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and today I'm sharing three big retirement planning updates for 2023. Specifically, I'm sharing a summary of important changes to Social Security payments, Social Security taxation, and Medicare Part B premiums. I'm also sharing an update on Secure Act 2.0, a couple of key highlights from the bill, and when we might finally expect it to officially be passed. Today, I'm sharing a summary of important changes to Social Security payments, Social Security taxation, and Medicare Part B premiums.
So if you're wrapping up your year-end planning and starting to think about 2023 and beyond, this episode is for you. For the links and resources mentioned today, just head over to youstaywealthy.com forward slash 171.
The first update that I have to share with you today is likely one that you're already aware of. It's already crossed your desk, but I wouldn't be doing my job here as retirement podcast host if I didn't at least highlight it briefly and also provide some additional details that you may or may not be taking into consideration.
And this update is that social security payments are once again going up next year. Specifically, about 70 million Americans will see an 8.7% increase in their social security benefits in 2023 due to the rise in inflation and in turn, the rise in the cost of living.
In other words, prices for goods and services are significantly higher this year than last. And this increase in social security payments, which will be about $140 more per month on average, this increase helps to offset those higher costs.
Even better, those who are collecting the maximum monthly payout at full retirement age, and by the way, this only represents about 2% of all recipients, but for those collecting the maximum monthly payout, those 2% of recipients, they'll see an increase of $282 per month next year.
And that's after the $197 per month bump that they received the year prior. So an increase of almost $500 more per month in social security income for those receiving the maximum payout over the last two years.
Now, while these increases are meaningful, it's important not to expect this sort of adjustment to happen every single year. In fact, the last time we saw an increase over 8% in social security payments was in 1981, 41 years ago. Cost of living adjustments often referred to as COLA. Historically, COLA adjustments have hovered around low single digits, somewhere between, you know, one and 4%.
And in some years like 2009, 2010, and 2015, there were no adjustments at all. And we can probably throw 2016 in there as well, since the adjustment that year was only 0.3%. And if you want to dig through all the historical data yourself to see the COLA adjustments through time, I'll link to a history of it in the show notes, which again, you can find by going to youstaywealthy.com forward slash 171.
So again, it's important not to expect this sort of adjustment to social security benefits to happen every single year.
When you're running long-term retirement projections, using a historical average or even something a little bit lower than the average to stress your plan even further is likely the right approach. And if you want to take it a step further, you might even consider running retirement projections without factoring in Social Security at all just to know that your plan is successful without it.
This can help bring even more confidence to your retirement plan, especially if you have personal concerns about the future of the social security system and if it will be around when you come to take social security benefits.
As for these 2023 increases, the Social Security Administration will be mailing out cost of living adjustment notices to everyone in December. And this includes disability beneficiaries, surviving spouses and traditional Social Security recipients. Now, if you've opted out of snail mail notices altogether, you can, of course, log into your dashboard on the Social Security website at SSA.gov in early December when those notices are finalized to view your updated benefit.
In fact, everyone who is listening right now, regardless of your age, should get registered on the social security website. If you haven't done so already, I'll link to it in the episode show notes to make it really easy for you.
Along with getting eyes on your social security benefits so you can use accurate numbers in your planning, getting registered will allow you to confirm that your personal information is accurate. We have heard from far too many people who learned that the social security administration had an incorrect birth date or even a wrong social security number for them in the system, preventing them from accessing their benefit information and getting their first check on time.
These issues can't always be fixed overnight. We're dealing with the Social Security Administration after all. So I'd suggest confirming everything is accurate right now and fixing any issues instead of frantically trying to correct things just as you're due to receive your benefits. So Social Security benefits are increasing by 8.7% next year. That's the first update to share with you today.
The second update to share with you today is an increase to the social security tax cap, which affects those who are still employed and earning an income. As a reminder, those in the working world send 6.2% of their annual earnings to social security or 12.4% if you're self-employed. But
but only until your income exceeds a certain threshold. This threshold often referred to as the social security tax cap is increasing next year by $13,200, bringing the cap up to $160,200. This change exposes more of your income to taxes and therefore puts more tax dollars in the social security system's pockets.
So when and if your income exceeds this new threshold next year, $160,200, when and if your income exceeds that threshold, you'll see a bump in take-home pay because you'll no longer be sending 6.2% of your income back to Social Security.
And for those of you who are currently taking Social Security and continue to work and earn an income, you'll be able to earn $1,680 more in 2023 before a percentage of your Social Security benefit is temporarily withheld.
Here are the details for how this plays out. If you are younger than your full retirement age, taking social security and still working and earning an income, you can earn up to $21,240 next year before benefits will be temporarily withheld.
But for those of you who are in the year that you turn your full retirement age and still working and earning an income, you can earn up to $56,520 next year in 2023. This is just over a 4,500 increase from 2022. And then as a reminder, after your full retirement age is reached, there is no penalty for working while collecting social security benefits.
Really quick, before we move away from social security, one little sneaky tax increase that flies under the radar every year is the lack of an inflation adjustment on the taxability of social security payments.
As most know, up to 85% of your social security benefits can be taxed if your modified adjusted gross income plus one half of your social security income exceeds $34,000 as a single filer and $44,000 as a joint filer.
Well, as wages have increased over the years and portfolio values get larger and larger and retirees receive cost of living adjustments on not just social security income, but also pension income, more and more retirees, whether they realize it or not, are being exposed to a larger percentage of their social security benefits being taxed.
Again, the formula for the taxability of social security income has never been adjusted for inflation. So more income means more tax revenue for the administration without having to announce any major changes and make headlines.
Okay.
I know not a very meaningful change here, but historically, it's only the fourth time Medicare Part B premiums have ever been reduced with the last decrease occurring in 2012. So if anything, just a rare event that we don't see very often.
As a reminder, Medicare Part B covers doctor's fees and outpatient services and are usually deducted directly from Social Security benefits. And the reason, if you're wondering why Part B premiums are being reduced, is largely due to a single Alzheimer's drug.
In November of 2021, the Center for Medicare and Medicaid Services, CMS, had planned on the possibility of Medicare Part B covering this new costly drug, which is why premiums were increased last year in anticipation of this coverage. Well, that never came to fruition, so premiums will be knocked back down to kind of true things up here. Lastly, there are dozens of other potential tax changes that will likely be announced soon. Some very positive, some not so much.
Many of these are a result of Secure Act 2.0, which hopefully will be passing soon. Right now, the Senate and House have each passed their version of the bill, and there are only some minor differences for them to work out. According to Andy Friedman, founder of the Washington Update, there is, quote, nothing contentious there. And for that reason, Andy actually believes the bill might get passed shortly after the November midterms in the lame duck session. So keep an eye out for that. And when and if it becomes official, I'll be sure to share that on the podcast.
If it passes, the required minimum distribution age or RMD age will be increasing to age 73 by this year or next, age 74 by 2029 and age 75 by 2032.
For what it's worth, Andy does not believe Congress would make RMD age increases retroactive for 2022. So that first RMD extension to age 73 likely won't go into effect until next year in 2023, assuming this all goes through as planned.
All in all, this is great news for retirement savers because it provides a longer window for tax planning in your gap years before those RMDs kick in. So if you haven't been as proactive with your tax planning as you would have liked, you will now hopefully have more time to get caught up.
For those who are still working, the bill also includes a new catch-up contribution window. In short, people who are aged 62 to 64, I know tiny little window there, but for those who fall into that age group and are still working, if the bill goes through as it stands, will be able to contribute an additional $10,000 per year to their 401k or 403b plans. If you contribute to a simple IRA plan, you can contribute an additional $5,000.
One thing to take note of here is that these catch-up contributions, if you fall into that age group, will be taxed as Roth contributions, meaning you'll pay taxes on the money that you earn before contributing to your retirement account. It will be an after-tax contribution that will then grow tax-deferred forever. This, of course, prevents the IRS from losing a large chunk of tax revenue due to the passing of a new bill while still giving people the benefit and opportunity to save a little bit more money for retirement.
As soon as the Secure Act 2.0 is passed and the anticipated wider 2023 tax brackets are confirmed, I'll be sure to dedicate an episode or two breaking everything down and sharing actual opportunities that you can consider to reduce your tax bill next year and beyond. Until then, stay focused on wrapping up all the year-end tax planning opportunities that are known and available to us this year, many of which require action before December 31st.
And to help, I'll be sharing a few interactive cheat sheets with Stay Wealthy newsletter subscribers this Thursday. So if you're not already on the email list receiving my weekly retirement newsletter, you can quickly join by going to youstaywealthy.com forward slash email. There's also a link in the show notes and in the episode description in your podcast app to make it even easier for you.
And if you don't get signed up in time for this Thursday, I'll be sure to include those cheat sheets for the next couple of weeks just to make sure I have everyone covered. Once again, to grab the show notes for today's episode, just head over to youstaywealthy.com forward slash 171. Thank you as always for listening and I'll see you back here next week.