Every year, Social Security reviews the inflation rate over the previous year, and if costs in general have gone up, so do people's Social Security checks. For 2017, the inflation adjustment is 0.3%. For a typical retiree who would otherwise be receiving a $1,355 check for January 2017, the inflation adjustment would lift that person's benefit check to $1,360. Unfortunately for most retirees, even that minuscule increase won't actually show up in their checks.
The reason is Medicare, where premiums are typically deducted from a retiree's Social Security check before the Social Security payment is made. Because of a "hold harmless" rule in Medicare, most Social Security checks can't decrease because of increases in your Medicare Part B premiums. Thanks to no Social Security inflation increase in 2016 and an anemic one in 2017, the 2016 increase in Medicare Part premiums are scheduled to be partially passed on to Social Security recipients in 2017.
How Medicare affects your Social Security payment
The standard Medicare Part B monthly premiums were $104.90 in 2015 before increasing to $121.80 in 2016, but most people didn't actually see that cost in 2016. Thanks to Medicare's hold harmless rule, most people who were receiving both Social Security and Medicare in 2015 saw their Medicare Part B premiums hold steady at $104.90 in 2016.
The average Social Security benefit is scheduled to increase by about $5 per month in 2017 because of the inflation adjustment. That's less than the $16.90 increase in Medicare Part B premiums in 2016. As a result, even if Medicare premiums hold steady in 2017, most Social Security recipients will see all of their 2017 increase eaten up by their Medicare premiums starting to catch up with the 2016 increase.
If you're new to either Medicare Part B or to Social Security in 2017, Medicare's hold harmless provision won't protect your 2017 Social Security check from your 2017 Medicare Part B premiums. While the base Medicare Part B premiums for 2017 haven't been announced yet, they're expected to be in the neighborhood of $149 per month. Whatever the level they're set at, any increase will simply delay the day when Social Security recipients actually see the benefits of Social Security's cost of living increases.
What this means to you -- whether or not you've retired
The unfortunate reality that Medicare cost increases are outpacing Social Security benefit increases reflects the fact that healthcare costs frequently increase faster than the overall inflation rate. In addition, people tend to spend more on healthcare as they age, even before considering the higher inflation rate in healthcare. That combination of factors makes medical expenses likely to be the biggest driver of your cost increases in your golden years.
To handle that reality -- and the reality that Social Security's increases first have to offset Medicare premium increases before they can handle increases in your other expenses -- you need another source of income for your retirement. Social Security was never designed to be a retiree's only source of income in retirement. Today's situation of minuscule Social Security inflation adjustments entirely eaten up by Medicare premium hikes simply drives that point home.
From a prospective retiree's perspective, that likely means investing to cover your other income needs. While a stock-focused portfolio may be a great way to build your wealth, as you approach and reach retirement age, you'll need to shift some of that money to assets with more certainty, such as bonds. As a general rule, money you need in the next five years does not belong in stocks, though money socked away for longer-term priorities can be a candidate to remain in the stock market.
In terms of how much you'll need, a general guideline is that your overall portfolio is likely to be able to sustain you throughout your retirement if you start with 25 times the annual expenses it has to cover. That number comes from a retirement guideline known as the 4% rule:
- Start with a diversified portfolio of stock and bonds.
- Withdraw 4% of the value of the portfolio for your first year of retirement.
- Adjust your withdrawals annually for inflation.
- Maintain the portfolio's diversification throughout your retirement.
And if you follow it, your portfolio has a very high probability of lasting at least 30 years. Remember, though, that you don't need to cover all of your expenses from your portfolio, just the portion above what you can expect from Social Security.
Get started now
Regardless of where you are in your retirement journey, the question of Social Security is one all Americans face. The sooner you get started on the path to cover the costs that Social Security won't, the easier it will be to build a nest egg that can help support your retirement lifestyle. There's no better time than today, so get started now.