Personal Finance
Turning 65? What to know when planning for Medicare, Social Security
A “silver tsunami” — with a record number of Americans expected to turn age 65 — is here.
Americans who reach that milestone age face high-stakes financial decisions.
Two of the most important choices retirees face — which Medicare health insurance coverage option to choose and when to claim Social Security benefits — come with deadlines.
And making a less-than-ideal selection may cost a retiree over their lifetime.
More than 11,200 baby boomers are expected to turn 65 every day from now through 2027, a phase that has been dubbed “peak 65.”
For many reasons, the generation entering this new life phase doesn’t have it easy.
A so-called three-legged stool of retirement planning — employer pensions, personal savings and Social Security — has largely gone by the wayside as many private-sector employees no longer have traditional pensions that may provide income throughout retirement, according to recent research from the Alliance for Lifetime Income.
Meanwhile, about 40% of households will not be able to maintain their pre-retirement standard of living due to insufficient retirement income, according to the Center for Retirement Research at Boston College.
Choosing Medicare coverage comes with trade-offs
Turning 65 ushers in a key milestone — eligibility for Medicare coverage.
Ideally, beneficiaries should sign up for all parts of Medicare the month before that birthday to avoid coverage gaps, according to a recent retirement report by J.P. Morgan Asset Management.
That coverage may come in the form of “original” Medicare — through Parts A and B, for hospital and medical insurance, as well as optional additional coverage through Part D drug coverage or medigap private insurance plans.
Alternatively, retirees may opt for private Medicare Advantage plans that may include prescription drug coverage and possibly also vision, dental and hearing.
Beneficiaries may revisit their coverage each year during open enrollment periods.
“It can be very confusing for people to sort through all of their options and try to figure out what the differences are across plans, but also what options will work for them over the next year and work well over the longer term as well,” said Gretchen Jacobson, vice president of Medicare at the Commonwealth Fund.
Today’s beneficiaries need to brace themselves for rising health-care costs.
A beneficiary who is 65 in 2024 and covered by original Medicare faces $542 in monthly costs on average, according to J.P. Morgan’s research. By 2054, when that beneficiary is 95, that may go up to $1,484 per month, J.P. Morgan said.
That’s based on an annual 6% health care inflation rate, which J.P. Morgan calls a “prudent” assumption.
In comparison, inflation is up 2.8% annually, based on the latest read of the Federal Reserve’s key inflation gauge, the personal consumption expenditures price index.
The monthly outlay for beneficiaries covered by Medicare Advantage is much lower, according to J.P. Morgan’s estimates. Someone turning 65 in 2024 may spend up to $427 per month for Medicare Advantage premiums and out-of-pocket costs. By 2054, when they are 95, that may climb to up to $990.
Based on the numbers, Medicare Advantage may seem like a better deal. But experts say there are trade-offs to consider.
New enrollees who opt for Medicare Advantage may later want to switch to original Medicare. But it may be difficult getting medigap coverage, depending on the state you’re in and your health status, said Sharon Carson, retirement insights strategist at J.P. Morgan Asset Management.
Having original Medicare also gives you more providers to choose from, as all providers who accept Medicare generally take original Medicare, Carson said. Consequently, retirees who split their time between two states tend to opt for original Medicare.
Because Medicare Advantage enrollees have no supplemental coverage, they should set aside more money for surprise out-of-pocket costs, Carson said.
Moreover, while retirees may opt for Medicare Advantage for the additional coverage those plans may provide, many people don’t actually use benefits such as dental, vision, fitness or over-the-counter medication coverage, recent research by the Commonwealth Fund found.
“They should also consider whether they will actually use those benefits, or if perhaps there’s a different plan that offers benefits they’re more likely to use,” Jacobson said.
Claiming Social Security early means taking a 30% cut
Americans who turn age 65 in 2024 have a Social Security full retirement age of 66 and 10 months.
For those who reach that age next year and thereafter, the full retirement age is 67, per changes enacted decades ago that are being gradually phased in.
The full retirement age is the point when retirees stand to receive 100% of the benefits they’ve earned.
But they may claim as early as age 62, though if they do so they will receive reduced benefits.
For those turning 65 now, that amounts to a benefit cut of around 30%. So if their full retirement age benefit is $1,000 a month, they will receive a $700 monthly check for life if they instead decide to claim at age 62.
Beneficiaries who delay even longer — up to age 70 — stand to receive a benefit increase of 8% per year for every year they delay claiming past full retirement age.
“The best financial asset you can have is a higher Social Security annuity,” said Teresa Ghilarducci, a labor economist and retirement security expert.
“It’s inflation indexed and guaranteed for life,” she said.
Yet only about 8% of beneficiaries wait until age 70 to claim, according to Ghilarducci, a professor at The New School for Social Research and author of the book “Work, Retire, Repeat: The Uncertainty of Retirement in the New Economy.”
“Everyone should know that you have a penalty if you collect before 70,” Ghilarducci said.
However, most people do not delay benefits that long simply because they can’t, she said.
They may be forced out of work early and need to dip into Social Security to supplement their income when retirement savings fall short. Or they may be working but have taken a job that pays a lot less and make up for those missing wages with their Social Security checks.
Those who can’t delay their Social Security benefits for years can still increase their lifetime benefit income by delaying for just a few months, Ghilarducci said.
“Do whatever you can to bridge to a higher Social Security benefit amount,” Ghilarducci said.
Morehouse College President David Thomas speaks during Morehouse College’s graduation ceremony, before US President Joe Biden delivers his commencement address, in Atlanta, Georgia on May 19, 2024.
Andrew Caballero-Reynolds | Afp | Getty Images
David Thomas, the president of Morehouse College, said his office fielded a surge of calls this week from worried students and their families concerned the Trump Administration’s “federal funding freeze” would directly impact college access.
The sudden scramble was “perhaps only rivaled by what happened in March of 2020 when we realized that the Covid pandemic was truly a threat,” Thomas told CNBC. He became president of Morehouse, one of the country’s top historically Black colleges and universities, or HBCUs, in 2018.
This freeze on federal aid “would create another existential threat as great as the pandemic,” he said.
More from Personal Finance:
White House freeze on federal aid will not affect student loans
Consumer protection agencies at risk in Trump’s second term
How this DC-area high school is trying to close the wealth gap
Thomas’ comments come amid ongoing confusion about how a freeze on federal grants and loans could potentially impact students and schools.
A Jan. 27 memo issued by the Office of Management and Budget, which would affect billions of dollars in aid, said the pause on federal grants and loans “does not include assistance provided directly to individuals.”
Although the memo was later rescinded, the White House said a “federal funding freeze” remains in “full force and effect.” It is currently on hold amid legal challenges.
Thomas, who is also on the Board of Trustees at Yale University, said college leaders across the country have spent the better part of the week focused on “the consequences of this action.” Morehouse immediately initiated a hiring freeze in preparation for a potentially significant financial disruption.
“All of the institutions are still in limbo,” he said.
What college aid may be affected
At Morehouse College, about 40% of the student body relies on Federal Pell Grants, a type of federal aid available to low-income families.
Following the memo’s release, the Education Department announced that the freeze would not affect student loans or Pell Grants.
“The temporary pause does not impact Title I, IDEA, or other formula grants, nor does it apply to Federal Pell Grants and Direct Loans under Title IV [of the Higher Education Act],” Education Department spokesperson Madi Biedermann said in a statement.
In addition to the federal financial aid programs that fall under Title IV, Title I provides financial assistance to school districts with children from low-income families. The Individuals with Disabilities Education Act, or IDEA, provides funding for students with disabilities.
The funding pause “only applies to discretionary grants at the Department of Education,” Biedermann said. “These will be reviewed by Department leadership for alignment with Trump Administration priorities.”
But questions remain about other aid for college.
The freeze could affect federal work-study programs and the Federal Supplemental Educational Opportunity Grant, which are provided in bulk to colleges to provide to students, according to Kalman Chany, a financial aid consultant and author of The Princeton Review’s “Paying for College.”
The disruption to federally backed research funding also poses a threat to college programs and staff.
‘Lots of reasons to still be concerned’
“There are lots of reasons to still be concerned,” said Jonathan Fansmith, a senior vice president at the American Council on Education.
“The administration has made it clear the executive orders will have implications for a huge range of existing awards and grants,” he said. “Those have implications for campuses and there is no more clarity in that regard than there was before.”
At Morehouse, “a huge portion of our faculty is supported by grants,” Thomas said. “If we can’t run the college, colleges like ours will probably be forced to drastically shrink themselves or close.”
Morehouse, located in Atlanta and founded in 1867, has more than 2,200 students.
Millions of families claim the child tax credit every year — and filing mistakes can delay the processing of your return and receipt of your refund, according to tax experts.
For 2024 returns, the child tax credit is worth up to $2,000 per kid under age 17, and decreases once adjusted gross income exceeds $200,000 for single taxpayers or $400,000 for married couples filing jointly.
The refundable portion, known as the additional child tax credit, or ACTC, is up to $1,700. Filers can claim the ACTC even without taxes owed, which often benefits lower earners.
However, a lower-income family who doesn’t know how to claim the credit “misses out on thousands of dollars,” National Taxpayer Advocate Erin Collins wrote in her annual report to Congress released in January.
More from Personal Finance:
Your tax return could be ‘flagged for audit’ without these key forms
Education Department: Trump’s federal aid freeze won’t affect student loans
Why you may be getting ‘shortchanged’ on CD interest rates
More than 18 million filers claimed the additional child tax credit in 2022, according to the latest IRS estimates.
By law, the IRS can’t issue ACTC refunds before mid-February. But the Where’s My Refund portal should have status updates by Feb. 22 for most early filers, according to the IRS.
Here’s how to avoid common child tax credit mistakes that could further delay your refund.
Know if you have a ‘qualifying child’
One child tax credit mistake is not knowing eligibility.
The rules can be “very confusing,” according to Tom O’Saben, an enrolled agent and director of tax content and government relations at the National Association of Tax Professionals.
To claim the child tax credit or ACTC, you must have a “qualifying child,” according to the IRS. The qualifying child guidelines include:
- Age: 17 years old at the end of the tax year
- Relationship: Your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister or a descendant of these
- Dependent status: Dependent on your tax return
- Filing status: Child is not filing jointly
- Residency: Lived with you for more than half the year
- Support: Didn’t pay for more than half of their living expenses
- Citizenship: U.S. citizen, U.S. national or a U.S. resident alien
- Social Security number: Valid Social Security number by tax due date (including extensions)
You may avoid some eligibility errors by filing via tax software or using a preparer versus filing a paper return on your own, O’Saben said. Tax software typically includes credit eligibility, which can minimize errors.
Missing Social Security number
Typically, parents apply for a Social Security number in the hospital when completing their baby’s birth certificate. But it can take one to six weeks from application to receive that number, according to the agency, which can create time pressure for families with a new addition around tax season.
Filing a tax return and claiming the child tax credit before receiving the Social Security number is a mistake, O’Saben said.
“I have seen [the child tax credit] denied for people who have filed before they got the Social Security number for a dependent,” he said. “And there’s no going back.”
If you don’t have the number before the tax deadline, you should request an extension, which gives you six months more to file your return, O’Saben explained.
However, you still must pay taxes owed by the original deadline.
Tax Fraud Blotter: No Alternative
IRS urged to do more to protect whistleblowers despite NDA
Stocks making the biggest moves after hours: AAPL, INTC, TEAM, DECK
New 2023 K-1 instructions stir the CAMT pot for partnerships and corporations
The Essential Practice of Bank and Credit Card Statement Reconciliation
Are American progressives making themselves sad?
-
Personal Finance1 week agoMortgage rates aren’t likely to fall any time soon — here’s why
-
Economics1 week agoThe new American imperialism
-
Personal Finance1 week agoRecruiters weigh in if LinkedIn’s ‘open to work’ feature helps or hurts
-
Finance7 days agoDEI dominates conversation among CEOs
-
Finance1 week agoBitcoin will hit a new all-time high in 2025, Binance CEO says
-
Accounting6 days agoCash Flow Management and Strategies for Financial Stability and Growth
-
Economics6 days agoE-Waste Management Solutions and the Circular Economy
-
Economics6 days agoTom Homan, unleashed