From the pandemic to politics and the economy, it’s been a wild year, especially for those near or in retirement. While some uncertainty remains in the outlook for 2021, here’s what you need to know about Social Security, Medicare premiums and retirement plan contributions.
Read about the valuable retirement plan and tax-related pandemic breaks set to run out at the end of 2020: Last Chance for 2020 CARES Act Retirement and Tax Benefits
Nearly 70 million Americans will see a 1.3% increase in their Social Security benefits and Supplemental Security Income (SSI) payments in 2021, the Social Security Administration announced in October.
The 1.3% COLA will begin with benefits payable to more than 64 million Social Security beneficiaries in January 2021. Increased payments to more than 8 million SSI beneficiaries will begin on Dec. 31, 2020. According to Andy Landis, author of Social Security: The Inside Story, the COLA is tied to the inflation rate — specifically, the CPI-Urban, measured on Sept. 30 each year.
The estimated average monthly Social Security benefits payable in January 2021 will be $1,543 for all retired workers; $2,596 for an aged couple where both are receiving benefits; $3,001 for a widowed mother and two children; $1,453 for an aged widow(er); and $1,277 for all disabled workers. The maximum Social Security benefit for a worker retiring at full retirement age is $3,148 per month.
The Social Security Administration will mail COLA notices throughout the month of December to retirement, survivors, and disability beneficiaries, SSI recipients, and representative payees. But beneficiaries can also learn their new benefit amount by logging into their personal Social Security account.
Other noteworthy changes:
- The maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $142,800 from $137,700.
- The earnings limit for workers who are younger than full retirement age (FRA) will increase to $18,960. (The Social Security Administration will deduct $1 from benefits for each $2 earned over $18,960.) The earnings limit for people reaching their “full” retirement age in 2021 will increase to $50,520. (The Social Security Administration will deduct $1 from benefits for each $3 earned over $50,520 until the month the worker turns “full” retirement age.)
- There is no limit on earnings for workers who are “full” retirement age or older for the entire year. “So if you reach FRA in 2021, consider starting your Social Security this year, even with substantial work,” says Landis. “You can work all you want and get SS at the same time.” See, from the Social Security Administration, How Work Affects Your Benefits for details.
- The full retirement age for a person born in 1954 or earlier is 66. If you turn 62 in 2021, your full retirement age (FRA) is 66 and 10 months, said Landis, who noted that FRA is different for different birth years, and determines almost everything about your Social Security. Find your FRA at the SSA’s retirement age calculator.
According to Landis, it’s worth noting that you get a “’100%’ payment if you start at FRA but you get less if you start early or more if you delay until later. Starting at 62 in 2021 gets you a 70.83% payment for life. Every month you delay Social Security (up to age 70) gets you a higher monthly payment for life.
Note that if you’re over 62 and haven’t started payments yet, you still get the raise “behind the scenes” in your future payments, says Landis, who notes you really get two raises behind the scenes as you delay payments: the monthly increase for delaying payments, plus the annual COLA.
When to file? The usual general rules apply, says Landis. “Delay as long as you can, up to age 70, if you can afford to and if you expect at least average life expectancy,” he says. “File earlier if you need the income, or expect a lower life expectancy.”
Medicare Benefits and Premiums
In November, the Centers for Medicare & Medicaid Services (CMS) announced the 2021 monthly Medicare Parts A and B premiums, deductibles, and coinsurance amounts.
The standard monthly premium for Medicare Part B enrollees will be $148.50 in 2021, an increase of $3.90 from $144.60 in 2020. “The Medicare inflation adjustments were pretty reasonable this time thanks to Congressional action that limited the Part B premium increase to 25% of what it normally would have been,” said Elaine Floyd, director of retirement and life planning at Horsesmouth. “Of course, we don’t know what effect this will have on premiums next year. I guess we’ll cross that bridge later.”
With the premium going up by just $3.90, Floyd says virtually no one needs to be “held harmless” this year, even with a meager 1.3% Social Security COLA. The Medicare law contains a hold-harmless provision that limits the dollar increase in the premium to the dollar increase in an individual’s Social Security benefit.
Also of note, about 7% of people with Medicare Part B are subject to the income-related monthly adjustment amount or IRMAA. The 2021 Part B total premiums for high-income beneficiaries can be found here.
For her part, Floyd recommends appealing your IRMAA if you are retiring. “If your income will be dropping due to work stoppage, you do not need to pay the high premiums figured off your high earnings when you were working,” she says.
Other noteworthy changes:
- CMS also announced that the annual deductible for Medicare Part B beneficiaries is $203 in 2021, an increase of $5 from $198 in 2020.
- The Medicare Part A inpatient deductible that beneficiaries will pay when admitted to the hospital is $1,484 in 2021, an increase of $76 from $1,408 in 2020.
- In September, CMS announced that the average monthly plan premium among all Medicare Advantage enrollees in 2021, including those who pay no premium for their Medicare Advantage plan, is expected to decrease 11% from 2020 to $21 a month
Read Medicare Advantage 2021 Spotlight: First Look.
Retirement Plan Limits
As for retirement plans, the Internal Revenue Service announced in October the 2021 cost-of-living adjustments to the dollar limitations for qualified retirement plans and other benefits.
Most of the dollar limits, including the elective deferral contribution limit for 401(k), 403(b) and 457(b) plans and the dollar limit for catch-up contributions (if age 50 or older), remain unchanged from 2020 limits. For instance, the maximum annual elective deferrals for 401(k)/403(b)/457(b) plans is $19,500. And the age 50 catch-up limit is $6,500, the same as it was in 2020.
The maximum one can contribute to an IRA is $6,000 per year with an age 50 catch-up limit of $1,000. The contribution limit for Traditional and Roth IRAs remains the same in 2021 at $6,000. Employees age 50 or older are eligible to contribute an additional $1,000, for a total of $7,000.
Meanwhile, the inflation-adjusted amounts for health savings accounts (HSAs) and high-deductible health plans for 2021. The HSA limit for self-only/family coverage will increase to $3,600 and $7,200, respectively for 2021. The maximum annual out-of-pocket expense limits for high deductible health plans for both self-only and family coverage will increase in 2021 but the minimum annual deductible will remain unchanged from 2020 limits.