benefits

Social Security Benefits

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Social security was signed into law by President Roosevelt in 1935. One of the intents of the program was to provide income for retired workers aged 65 or older. The purpose of the Social Security Act was to help destitute aging individuals who were not receiving regular income. The program calculations have changed a bit over the years, but the purpose has remained the same: provide a minimum income to aging individuals, not to provide a source meant as your sole income stream.

Today, most of the United States workers pay into social security through a 6.2% payroll withholding; such withholding ceases once you make $160,200 or more (in 2024). An individual’s year of eligibility is based on their birth year, rather than being exactly 65 years old like it was originally, and is called the normal retirement age. Additionally, there are penalties for filing early and bonuses for filing later than your normal retirement age. The year you file for social security has implications on your income, which I’ll cover later.

CALCULATING SOCIAL SECURITY RETIREMENT INCOME

Social security benefits are computed based on an individual’s highest 35 years of indexed income. The income is indexed, or adjusted, to account for inflation over the years. If you made $10,000 in 1985, that equates to making about $25,000 in 2022. I mention that it’s in year 2022 and not today because indexing applies to all income older than the last two years, while the most recent years are taken at face value. Indexing ensures that your future benefits account for inflation to make them fair and equitable in the year you need that income, and makes all of the annual salaries of your working years comparable.

Once the indexed total is known for all working years (up to the highest 35 years worth), the totals are added together and divided by the total number of months worth of earnings. The average monthly earnings amount is then used to calculate the primary insurance amounts (PIA). The PIA is the amount paid out monthly if an individual waits until their normal retirement age, which is a table published by the Social Security Administration (SSA) and is based on birth year.

According to the SSA website, an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2024, or who dies in 2024 before becoming eligible for benefits, his/her PIA will be the sum of: (a) 90 percent of the first $1,174 of his/her average indexed monthly earnings, (b) 32 percent of his/her average indexed monthly earnings over $1,174 and through $7,078, and (c) 15 percent of his/her average indexed monthly earnings over $7,078. The percentages are based in law, but the dollar amounts, which are called ‘bend points,’ are updated annually based on the national average wage index. These bend points ensure the program weights benefits to lower income earners, and phases out benefits as an individual’s income increases.

Here’s an example that shows how the bend points are used to calculate the PIA, which is the monthly benefit amount that would be paid out to someone who retires at their normal retirement age and is eligible to receive 100% of their PIA. The monthly indexed earnings over the life of their 35 year career was $10,000. The bend points are applied to each bracket of income up to their max of $10,000, and then the bend points are added together. The total is rounded to the nearest dime though.

If you draw before the normal retirement age, but no earlier than 62, the PIA is reduced by as much as 30%. If you draw after your normal retirement age, the PIA is increased by 8% per year, until you reach 70. In the above example, the earner who made $10,000 a month average over the course of their career will receive ~$3,383 a month if they file for social security benefits at their normal retirement age (in 2024 numbers). If they chose to draw at 62, they’d receive 30% less of their PIA, equating to approximately $2,368 per month. However, if they chose to draw later than their normal retirement age, they would receive more than their PIA (with the amount depending on their normal retirement year).

As you can see, social security is not intended to replace your pre-retirement income. It is meant as a safety net to ensure some level of financial security. If you’d like to live a more lavish retirement, you need to plan ahead with additional sources of income/savings to draw from (e.g., retirement plans like a 401k, Individual Retirement Account (IRA) contributions).

WHEN TO DRAW

We recently heard a conversation where someone told another person that they should definitely claim as soon as possible. However, if you’re not in a situation where you absolutely need that income per month, it’s best to wait. Once you draw, you lock in that dollar amount, save for cost of living adjustments as authorized. Cost of living adjustments for inflation, or COLAs, are based on the Consumer Price Index and announced annually in October.

The year you draw is based on your outlook on your life expectancy, your income need based on lifestyle, and your other income sources. This isn’t a decision you need to make at 35, but you should be watching and planning this over the course of your life. If you’re in good health and active at 62, and have saved enough to live off other funds or are still working, it likely wouldn’t be in your best interest to claim social security benefits.

If you’re born in 1960 or later, your normal retirement age is 67. At 67, you get 100% of your PIA. If you file at 62, which is the earliest you can file, you get 70% of your PIA. If you wait to file until after your normal retirement age, then you get 8% each year until 70. On the graph above, I used a PIA of $3,500 to determine the values for the example. You can see that if you were to file at 62, your cumulative income line over the rest of your life time is a flatter line. You’re receiving a smaller benefit, so it’s adding up slowly. Where the lines intersect is how you’ll determine your break-even draw year. For instance, if you think you’ll live until at least 77, then it’s not worth doing an early draw at 62 because a draw at normal retirement age will provide you more income over the course of your life. If you think you’ll live past 81, then deferring your social security filing until 70 yields the most lucrative scenario.

RETIREMENT AND WORKING

There are stipulations associated with claiming benefits and still working, which is another factor to consider when drawing social security. If you’re 62 and still working, then it may not be in your best interest to collect social security. While you can still work while claiming social security, the SSA may reduce your benefits. The SSA reviews income earned against benefits paid out, and may adjust if there was employment income in the previous year (i.e., income based on pensions or other retirement benefits does not constitute current employment income).

If you are under normal retirement age for the entire year, the SSA deducts $1 from your benefit payments for every $2 you earn above the annual limit, which is $22,320 in 2024. In the year you reach normal retirement age, the SSA deducts $1 in benefits for every $3 you earn above a different limit, which is $59,520 in 2024. It’s likely you don’t “need” that money because you’re still working, your benefit isn’t increasing like it would if you deferred, and you’re actually receiving less money in benefits than based on the normal formula.

SUMMARY

There is no hard and fast rule on when to draw these benefits. The point is to be educated on your options. We don’t recommend you rely on someone else’s opinion on the matter or how it worked for them, as each person’s variables are different. Generally, if you’re in good health and still producing income, drawing on the social security benefits earlier than normal retirement age isn’t going to be your best financial move.

As is the case with most personal finance topics, having diversified income sources in retirement, regardless of what age that is, will set you up to make decisions absent emotion and desperation, and for the betterment of your entire financial picture. Utilize your 401k and all available match, your IRA, your taxable savings, and perhaps your pension, so that Social Security is just one more tool in your financial picture, rather than the only one.

Medical Bills

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Here’s something different. Medical insurance isn’t something I’m going to pretend I understand fully, but I know enough to protect my money. So here’s two quick stories about how due diligence saved us hundreds.

First, an overview.

When you see a provider (e.g., doctor), they bill your insurance on your behalf. The claim that’s submitted is reviewed by the insurance’s benefits administrator, and any coverage is paid out. Your insurance will likely have a “disallowed” amount (what your insurance deems is too expensive to be billed for the given service), a benefits paid amount (what insurance pays on your behalf), and then a member responsibility amount (what you owe). Once the claim is processed, these are outlined in an explanation of benefits, or an EOB. If and when you receive a bill from the provider, verify against your EOB to ensure that it aligns with your insurance benefits.

Here’s an example of an EOB. By using a provider that is in-network (in a negotiated agreement plan with my insurance company), the doctor and the insurance have agreed costs for services provided. My insurance’s “allowances” are negotiated with each provider who participates in the network. Allowances may be based on a standard reduction or on a negotiated fee schedule. For these allowances, the provider has agreed to accept the negotiated reduction and you are not responsible for this discounted amount. In these instances, the benefit paid plus your coinsurance equals payment in full. So here, for the services that I received, the insurance company is saying, “I see you billed for $115, but we agreed that this service only costs $65.34, so that’s what we’re allowing.” You, as a covered member, are not charged for the ‘disallow’ amount of $49.66.

In our case, we have a high deductible plan, which means we have to spend a certain amount of money on covered services before the insurance pays out benefits. Ours is $3,000. This means that for the first $3,000 worth of doctors visits to in-network providers, we’re paying the total allowed amount (e.g., our son had to go to the ER, and we paid $609 for the visit, which is the fully allowed amount). There are plans out there where you don’t have a deductible, but you have a copay (e.g., I had a plan where I paid a flat $20 for each doctor’s office visit and $125 for each hospital visit, but I was also paying a higher premium for that coverage type). In a future post, I will share how we compared our plan options and chose a high deductible plan.

After we meet the deductible, most of our services are covered at 95% (i.e., we’re responsible for paying 5% of the allowed charges). In the example above, we had to pay 5% of the $65.34, or $3.27.

There are tons of nuances to insurance though, but hopefully this broad overview helps understand how to read the EOB. I have more stories of where my interpretation of the coverage in my brochure doesn’t seem to match the benefits administered, but those are for another time. For now, here’s how we protected hundreds of dollars by staying on top of our coverage.

MR. ODA’S STORY

Speaking of nuances, here’s one of those. Preventative care is covered at 100% (e.g., maternity screenings and annual physical exams). Mr. ODA needed a physical to qualify for his agency’s wellness program (they’re given 3 hours per week to exercise). When he went to get the physical, it got coded as a sports physical because the doctor had to sign off on a paper that said he was healthy enough to participate in the wellness program. A routine annual physical is fully covered by insurance, regardless of deductible. Apparently, a sports physical is not the same concept and regular coverage requirements apply.

Mr. ODA had to call back to explain that the exam was routine with a signature on paper, and not any more in depth to be considered a sports physical. The doctors office offered a reduction in the amount owed, twice, but eventually realized they were spending more in postage and phone calls than the bill was worth while Mr. ODA fought the coding, and they wrote it off.

MRS. ODA’S STORY

I saw a doctor in December 2019 when having pregnancy complications. In February 2020, I received a bill, which I promptly, and erroneously, paid. A few days ago, I received a check for the amount I paid a year and a half ago. So it wasn’t a quick resolution, but I wasn’t going to let $300 go.

The bill said:
Charges to Date: $451.00
Payments/Discounts to Date: $157.85
Remaining Patient Balance: $293.15

I had seen multiple doctors in a short period of time, so I was just in auto mode to pay all the medical bills that I had. After I paid it, I realized that on the back of the bill there were more details about that “payments/discounts” line item. There were three columns: Insurance Payments, Patient Payments, and Adjustments to Date. The total $157.85 was in the Adjustments to Date column, and the insurance column said $0. I checked into my insurance claims online and didn’t see this date of service. Well, I’m insured, so this should have been submitted to my insurance for review first. I called the hospital to indicate that there was an error made, and I shouldn’t have paid this in full, even with an “uninsured discount” they graciously offered me.

I called the hospital to ask why this wasn’t submitted to my insurance and discovered that my name was spelled wrong, my insurance was entered wrong, and this claim wasn’t tied to all my other hospital-related claims I had processed. Supposedly, they updated my information and resubmitted. I still didn’t see it on my online claim history after the 30-45 day window they told me, so I called again in April 2020. I was told they would resubmit. Two months later, I was managing a newborn and we were just deciding to move, so this fell off my radar. Then all of our things were in storage for two months. By the time I got this paperwork back out, it was March 2021.

I explained my story to the hospital again and asked for it to be properly submitted. I was again told they would submit the claim, but this time they’d submit by paper handling. Again, nothing showed up in my insurance. I called in April 2021 and was again told that they would try submitting again. This time I escalated to a supervisor. I said that this was unacceptable, and I didn’t want to keep being told they would try again, delaying my reimbursement by another 30-45 days each time I called. The supervisor said she would ensure the paper claim was sent out and call me back in a week. I never got the call. On May 18, I called again, immediately asking for a supervisor. This supervisor said that my account showed a refund was approved, but he needed to issue it (why couldn’t that just have been done?!).

Well, on June 1, I received a check in the mail for $293.15. That’s the amount I paid back in February 2020 for a December 2019 date of service. I could have written this off in my mind a year ago and not made these five or six phone calls, taking about 90 minutes of my time in total. I could have said to myself, “I called. There’s nothing more I can do.” But we wouldn’t be in the position we’re in now with our finances if I kept saying “oh well, that’s all I can do.”

The moral of the story is that you should be an informed consumer. If you know how to determine your benefits and calculate your coverage, you can make sure the proper payments are made to the provider, and that you aren’t overcharged.