How Does Social Security & Medicare Affect Your Financial Plan?

By Chris Palabe, CFS®, AIF®

A good financial plan focuses on personalized service geared toward meeting your needs today and building a firm foundation to meet your future needs as well. Two important pieces of your plan are Social Security and Medicare.

Social Security refers to the federal government-issued monthly stipend you’ve earned from paying income tax during your working years and Medicare replaces an employer-sponsored health insurance plan during retirement. While these benefits are great, they’re only a piece of your plan, not your whole plan.

Other variables come into play in terms of how far you can stretch these benefits to cover your needs and desires, including your income, health status, and goals. Let’s review both to learn how they affect your financial plan.

Social Security

You have a choice as to when you start collecting Social Security. While you’re first eligible at age 62, there are benefits to pushing off your first payment. The federal government rewards retirees for each month they defer receiving their benefit by increasing their monthly payout.

The full retirement age is 66 if you were born from 1943 to 1954. The full retirement age increases gradually if you were born from 1955 to 1960, until it reaches 67. For anyone born 1960 or later, full retirement benefits are payable at age 67. (1) At full retirement age, you would receive your full monthly payout as calculated by the Social Security Administration; their formula utilizes your indexed income data to land at your monthly benefit. Collecting early can reduce your monthly payment by 25 to 35%. (2) 

This is where planning comes in. Without a financial plan, how can you determine when to start collecting Social Security? Your plan should include savings strategies, investing opportunities, a timeline, and a withdrawal strategy. 

It’s through a withdrawal strategy that you determine exactly when and how to utilize your saved funds in combination with Social Security to meet your monthly retirement financial needs. Because Social Security is based on your taxable wages, everyone’s monthly benefit is different. This is why you simply can’t mirror someone else’s plan—all are unique.

Medicare

Medicare is designed to replace health insurance for retired Americans. The healthcare benefits are available to all age 65 and older. Medicare Part A is your hospital coverage and Medicare Part B is your traditional health insurance, covering doctors’ visits, outpatient needs, medical devices, and testing. 

The programs are affordable but not free. You will need to plan for the monthly plan expenses. Beyond Medicare Part A and B, you may choose to add supplemental insurance, including Part D for prescription drug needs. Your health status and need for prescriptions play into whether or not you choose this added benefit. (3)

You’ve also likely heard of Medicare Part C or Medicare Advantage Plans. Choosing an Advantage Plan means your benefits will be through a health insurance company. People often choose this route if they are interested in added benefits like vision and dental. One drawback is your access to care may be limited to certain providers.

As you can see, if you think that Medicare simply covers all of your healthcare needs, you’ll end up disappointed. Traditional Medicare, Part A, and Part B will indeed cover many needs, but it’s important to plan for added healthcare costs.

As you begin planning, long-term care needs are also a critical piece of your financial plan. Medicare does not typically cover nursing home care, which means you may need to purchase separate long-term care insurance or will have to rely on personal resources to pay for this type of care.

Your Financial Plan

At the end of the day, there’s no one-size-fits-all financial plan. While tried-and-true principles apply to many, and Social Security and Medicare are benefits to plan around, understanding the costs of each is key to your retirement success.

It’s a wise idea for pre-retirees to meet with a qualified financial advisor to create a customized plan designed to build a solid foundation for their future. When you’re ready to crunch the numbers and formalize a plan, schedule a 15-minute introductory phone call or call us at 847-249-6600 to learn if we are the right fit to achieve your financial goals.

About Chris

Chris Palabe is the founder and CEO of Palabe Wealth, a financial services firm providing retirement plan strategies for businesses and individuals. For 25 years, Chris has been serving his clients with customized plans and a boutique approach. He started his firm because of his passion for making a difference in others’ lives and a genuine desire to build long-term relationships with his clients so they can seek to achieve their ideal retirement and manage risk. Chris is a Certified Fund Specialist® (CFS®) and Accredited Investment Fiduciary® (AIF®) professional and has a degree from Université Denis Diderot (Paris VII). When he’s not working, you can usually find him riding horses and competing in dressage at a national level. He also loves reading, watching movies, and eating out. To learn more about Chris, connect with him on LinkedIn.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

This material was prepared for Palabe Wealth Inc.’s use.

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(1) https://www.ssa.gov/benefits/retirement/learn.html#h1

(2) https://www.ssa.gov/OACT/quickcalc/earlyretire.html

(3) https://www.medicare.gov/what-medicare-covers/your-medicare-coverage-choices/whats-medicare