With high inflation, a bear market, supply constraints, and talk about recession throughout the year, it’s been challenging for seniors and retirees.
It’s about time for retirees to get a well-deserved break in 2023, which will happen on several fronts. It’s anyone’s guess where the market will be next year, but retirees will receive these benefits in 2023, putting more money in your wallet:
- higher social security checks
- pay lower Medicare premiums
- be able to contribute more to their retirement accounts with higher income ranges
- Your required minimum distributions (RMDs) may go down, and will Congress gradually raise the age for RMDs?
When was the last time you got such good news? Retirement is that time in life when your income sources change from earnings to employer-based retirement benefits, private savings, investments, Social Security income, and potentially part-time income. The increased senior benefits should help retirees on a tight budget to fight inflation.
We’ll walk through the net positives you should expect in 2023, but first, let’s look at the retiree landscape.
According to Social Security Administration (SSA):
- In 2022, an average of 66 million Americans will receive a monthly benefit.
- Nearly nine out of ten people age 65 and older were receiving a Social Security benefit as of June 30, 2022.
- Social Security benefits represent 30% of the income of the elderly.
- Retired workers and their dependents accounted for 76.1% of total paid benefits in 2021.
- The number of Americans 65 and older will increase from 58 million in 2022 to about 76 million by 2035.
1. Boosting Cost-of-Living Adjustments Social Security Retirement Income
Starting in January 2023, there will be an 8.7% cost-of-living adjustment or COLA in benefit checks for Social Security and Social Security Income (SSI) for roughly 70 million people. This increase is the largest since the 14.3% COLA record in 1980, soon after the SSA adopted COLA in 1975.
The SSA calculated COLA based on the Consumer Pricing Index (CPI) on year-to-year price changes in a market basket of consumer goods and services in urban markets using year-to-year third-quarter prices. The average increase will be about $145 per month or $1,740 in 2023. While not a windfall, the addition will be helpful in the current inflationary environment.
2. Increase In Maximum Taxable Earnings
The higher inflation we have been experiencing this year stems from several factors, including higher average wages in the US. The SSA has raised the maximum taxable earnings subject to Social Security taxes to reflect increased salaries from $147,000 to $160,200 in 2023. The higher taxable income will mean workers will be paying slightly higher taxes.
Only about 6% of Social Security recipients earn the maximum benefit. To get the maximum benefit, you must make a full taxable wage for 35 years and not claim social security until you reach age 70. and pay the respective taxes yearly.
3. Retirement Earnings Test Exempt Amounts
The retirement earnings test applies only to people below normal retirement age (NRA). Social Security withholds benefits if your earnings exceed a certain level, called a retirement earnings test exempt amount, and if you are under your NRA.
The normal retirement age (NRA) or full retirement age was 65 years for those born in 1937 and previously. In 1983, Congress lifted the age criteria from 65 to reflect the more extended life longevity gradually to now 67 years for those born in 1960 or later. It’s the age at which you’ll receive full retirement benefits if you elect to begin receiving full retirement benefits at that age.
The earliest you can apply for social security is age 62, while the latest is age 70, after which there is no added benefit for waiting longer. The advantage of delaying retirement to age 70 is that your monthly benefit will be 132% higher due to the 48 months difference.
The maximum Social Security benefit depends on the age you retire. For a worker retiring at a full retirement age of 67, the benefit increases to $3,627 per month ($43,524 annually), an 8.4% increase from $3,345 ($40,140). If you delay your application to age 70, you will be getting a higher amount; if you apply at age 62, it will be lower.
4. Estimated Average Monthly Social Security Benefits Payable in January 2023
The Social Security monthly benefit changes based on individual circumstances and applying the 8.7% COLA. Here are the estimated monthly social security benefits payable in January 2023:
- $1,827 for all retired workers.
- $2,972 for an aged couple, both receiving benefits.
- $3,520 for a widowed mom and two children.
- $1,704 for an aging widower living alone.
- $2,616 for a disabled worker, spouse, and one or more children.
- $1,483 for all disabled workers.
5. Exempt Amounts Under The Earnings Test
Social Security would apply a retirement earnings test (to determine the withholding of benefits) only to people below the normal retirement age of 67 if they were born in 1960. They will withhold benefits if your earnings exceed a certain level or a retirement earnings test exempt amount.
One of two different exempt amounts applies — a lower amount in years before the year you attain NRA and a higher amount in the year you reach NRA. These exempt amounts generally increase annually with increases in the national average wage index.
Suppose you start to collect benefits before reaching the full retirement age. In that case, Social Security withholds earnings exceeding the annual amount of $21,240 in 2023 at $1 in benefits for every $2 of earnings above the limit. This amount compares to the 2022 amount of $19,560.
On the other hand, for people who reach the normal retirement age of 67 in 2023, the annual exempt amount jumps to $56,520 annually or $4,710 monthly before the SSA withholds benefits for every $1 in benefits on a more favorable $3 earned above the limit.
6. Medicare Premiums Are Declining In 2023
Although SSA and the Center For Medicare & Medicaid (CMS) are separate federal entities, they work together regarding Medicare sign-up options, processing applications, and collecting Medicare premiums.
Each year the Medicare Part B premium, deductible, and coinsurance rates are determined according to the Social Security Act. Medicare Part B premiums will decline slightly in 2023 to $164.90 monthly premium from $170.10 in 2022 upon the determination that lower spending on a new drug, Aduhelm, and other Part B items resulted in more significant reserves than needed CMS is passing the savings to those (close to 60 million people) with Medicare Part B.
7. Higher Retirement Contribution Limits in 2023
According to the Bureau of Labor Statistics, in March 2021, 68% of private industry workers had access to retirement benefits through their employer, with 51% participation. 92% of state and local workers had access to retirement benefits, with 82% participation. There must be full participation in retirement accounts, with increased contributions in your early working years, well before you retire.
According to Vanguard, the average 401K retirement balance at 65+ is $255,151, with the median balance at $82,297. The earlier you can increase contributions to these essential retirement plans, the more compounding will increase your amounts when you are at the retirement doorstep.
When saving for retirement, it is best to max out the amounts you may contribute. In 2023, the IRS raised contribution limits for employer-sponsored retirement and IRA plans.
The IRS raised contribution limits for 401K, 403 (b), most 457 plans, and the Federal Government Thrift Savings Plans.
- The 401K limit increases to $22,500 in 2023 from $20,500 in 2022.
- IRA limit increases to $6,500 from $6,000.
- The IRA catch-up contribution for those 50 years and over remains $1,000.
- The catch-up contribution limit for employees aged 50 and over in 401K, 403 (B), most 457 plans, and Thrify Savings plans rise to $7,500 from $6,500.
- The catch-up for 50 and over in SIMPLE plans increased to $3,500 from $3,000.
In addition to the increased limits, income ranges for eligibility to make deductible contributions to IRA and Roth IRA will rise in 2023.
For single taxpayers covered by a workplace retirement plan, the new amounts are $73,000 to $83,000, from $68,000 to $78,000.
For married couples filing jointly, if the spouse makes an IRA contribution and has a workplace retirement plan such as 401K, the 2023 amounts are between $116K to $136K, up from $109K to $129K.
For IRA contributions not covered by a workplace retirement plan and for an individual who is married to someone who is covered, the amount increases to $218K-$228K, up from $204K to $214K.
For singles or the head of the household, the Roth IRA increases $138K- $153K from $129K-$144K. Married couples go up to $218K-$228K, an increase from $204K-$214K.
8. Potential For Decreased RMDs From A Challenging Stock Market
Roth IRAs do not require that you withdraw required minimum distributions (RMDs) as you pay your taxes upfront when you make your contributions, compared to 401K and traditional IRA plans, which defer taxes.
Your required minimum distribution is the minimum amount you must withdraw from your account each year. Through the SECURE Act, Congress raised the age for mandatory withdrawals from 70.5 years to 72 years. Taking this money from your retirement account would be best to avoid penalties. A later bill, The Securing a Strong Retirement Act of 2022, or Secure 2.0 Act, which has strong support, may gradually lift the age to 75 years.
When you reach age 72, you need to take out minimum amounts from your retirement accounts, beginning by April 1 after you reach 72. Now that you know when to start making minimum distributions, how much is the minimum?
Calculating Your RMDs
The required minimum distribution for any year is the account balance at the end of the preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table” effective January 1, 2022. There are other tables representing beneficiaries of inherited retirement accounts.
Jack’s RMD Example
To calculate the RMD, divide the prior December 31 balance by the life expectancy factor. Using this table, Jack is 75 and has $100,000 in his traditional IRA account. His distribution period (i.e., life expectancy) is 24.6. Jack’s RMD is $4,065 by dividing $100,000/24.6, New Uniform Table RMD factor. If Jack fails to withdraw that amount by the deadline, there is a 50% tax on the amount not withdrawn.
The new table will be out on January 1, 2023, and the year-end account balances of many retirees may have declined due to the volatile market in 2022, potentially resulting in lower RMDs due in April 2023. As seniors age, life expectancies decrease, and RMDs will increase in later years, notwithstanding a market downturn.
Whether you are already retired or about to be, it’s essential to stay on top of the changes from the SSA or IRS so that you can modify your budget. In the case of 2023, most of the adjustments are positive though not significant enough to be a windfall. Hopefully, you will better understand how your social security and other retirement benefits work.
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With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.