Retirement Financial Realities

If you and your wife both worked and are now retired, you are aware that each spouse receives from Social Security a retirement benefit that is the greater of their own benefit or 1⁄2 of their spouse’s benefit. So, if John’s monthly benefit is $2000, and Mary’s were $800, Mary would receive $1000 per month. When John passes away, Mary’s benefit would become $2000 (or its then equivalent).

In a similar vein, suppose Mary had worked for a municipality, college or other entity where she did not pay Social Security taxes and her monthly pension benefit is now $600. In that case, the same offset technique would apply, and Mary would receive $400 each month from Social Security.

We are all aware of the endless discussion about the need to pare back entitlements, and the most oft- mentioned target is Medicare. Medicare is in terrible financial shape. Social Security’s supposed trust fund is on target to run dry in 2033, but Medicare will be dead broke by 2024, according to the government’s own estimate. Forgetting about inflation, if a couple earning average annual wages of $44,600 each attain age 65 in 2020, they will together receive a total of $427,000 in lifetime Medicare benefits, but will have paid only $153,000 in lifetime Medicare taxes. These projections are from the Urban Institute, a social and economic research organization.

On the Social Security side however, the couple will receive $632,000 in retirement benefits after having paid in a total of $700,000 in Social Security taxes.

The picture doesn’t look much better going forward. Medicare trustees project that Medicare costs will grow from approximately $486 Billion in 2011 to whatever 5.7% of GDP will be by 2035 and will continue to increase thereafter. And baby boomers account for a big part of this projected growth. Roughly 10,000 baby boomers will turn 65 every day in the next 20 years, according to the Pew Research Center.

Roth IRA’s are even better now than was initially thought, due to the manner in which the 3.8% surcharge on wealthy retired Americans is levied. A wealthy single with $200,000 in retirement income ($250,000 for married couples) receives $80,000 in 2013 as a required minimum distribution from his traditional IRA. The $80,000 amount above the threshold will be hit with an additional 3.8% tax in addition to other taxes. This is an increase of $3040 in taxes. If, however, that $80,000 were from a Roth IRA, there would be no additional tax since Roth IRA payments are not part of the Modified Adjusted Gross Income Calculation that is used to determine what income is subject to the surtax.

Going forward, there are now three distinct tax brackets for retirement income:

15% is the first bracket and is comprised of singles with a Modified Adjusted Gross Incomes (Adjusted Gross Income + any foreign income exclusion) of less than $200,000 ($250,000 for couples). The health care surtax and the 20% capital gains rate will not apply to them.

18.8% is the second bracket for those whose MAGI is more than $200,000 but less than $400,000, and they will pay 15% on their capital gains and dividends, and 3.8% extra on their investment income over $200,000, or their MAGI over $200,000, whichever is less.

23.8% is the third bracket for those whose unearned income from capital gains and dividends is more than $400,000. Everything over $400,000 is taxed at 20%, plus the 3.8% on investment income or MAGI, whichever is less.

Thanks to Laura Stover for this bracket info.

Got a financial planning question for Greg? You may e-mail him at greg@lifesolutionsonline.net

Full disclosure: Greg Roberts is a certified life underwriter and a Certified Financial Planner. He holds an MBA from the Wharton School of Business. He is also the brother of Athens Patch editor Rebecca McCarthy.