Social Security and Medicare planning are critical for your clients in or nearing retirement. Even the wealthier names in your book will have been interested in the Social Security Administration’s 8.7% increase in the Cost-of-Living Allowance (COLA).
What might the biggest increase in 41 years mean to retirees and your clients? Most significantly, the increase is designed to mitigate the current high rates of inflation for those on fixed incomes. However, the change gives advisors the chance to ensure their clients are making the right choices, and to look at other options they might have to protect their retirement plans as the value of fixed income decreases.
You may have seen some takes highlighting the increase as a “good news/ bad news” scenario. This is something of a mischaracterization as the increase is a fixed entity whereas the inflation rate is fluid: the rate will not go down should inflation do so. In the medium to long term COLA should provide your clients some flexibility. Inflation was here already, so this news definitely leans good.
Importantly, Medicare Part B monthly premiums are being reduced from $170.10 to $164.90—$5.20 lower. These payments are deducted directly from Social Security benefit checks. It doesn’t sound like much but means that beneficiaries will be able to keep all or most of their increase. To calculate the overall increase with Medicare, take your client’s net Social Security benefit, add the Medicare premium and multiply that by the 2023 COLA.
The increase may tempt your clients to think about retiring earlier than the Federal Retirement Age (FRA). This is rarely a good idea unless they really need the additional income for day-to-day living. Advisors can remind anyone considering retiring early that waiting until age 70 will increase the future benefits they will receive. A locked-in annual return of 8% for each year delayed that also annually adjusts with inflation thereafter is worth waiting for!
One option a married couple has would be for one of them to retire and start collecting while the other continues to work. Take care to calculate overall income here so that any benefit isn’t lost to income tax—especially for new retirees where retirement earnings limits come into play. For advisors the opportunity here is to encourage clients to look at options that protect and guarantee their retirement income.
COLA increases for your clients might not mean they will be clamoring to make new investments—the average monthly increase is around $140 per month—but it’s a change that allows advisors to demonstrate their experience, skill, and value.
For reference, here is the SSA’s press release on the COLA increase.