Introduction

For higher income Medicare beneficiaries, the income related monthly adjustment amount (IRMAA) could add thousands of dollars to their Medicare Part B and D premiums.  

For beneficiaries on a fixed income, this increased (and increasing costs, see below) cost is just one more problem that needs to be addressed and planned for.  

One solution to the IRMAA problem may be annuities.  

The Problem

Social Security benefits are projected to increase by only 2.4% (Social Security Administration, 2024).  While Medicare premium increases have averaged over 6% from 2003 to 2022 (Vankar, 2024).  On top of that, depending on which IRMAA surcharge bracket you fall into, those costs have increased significantly as well from between 4.94% to 8.02% (2007 – 2021) (Annese, 2024).   

From this information, the problem is evident.  Medicare and IRMAA costs will outpace Social Security in the future.  For most beneficiaries’ Medicare premiums are automatically deducted from their social security benefit.  This problem is illustrated below.  

Let’s assume that a 65-year-old currently earns $130,000 and is planning on retiring in 2024.  The SSA quick calculator estimates that his social security benefit is approximately $32,000 per year increasing 2.4% to $60,790 by age 90.  

As shown in the chart above, Medicare costs become an ever-increasing percentage of this beneficiary’s social security benefit, increasing from 26% to 37%.  

Note: “Net SS Benefit” assumes a 16.54% effective tax rate.  The charts in this article also assume a 6% increase in Medicare premiums per year and a 2.5% increase for IRMAA surcharges.  

Role Annuities Can Play

One example of the role that annuities can play is shown below.

If the beneficiary had bought a $100,000 deferred annuity.  The payouts are deferred for 5 years to age 70 and payout $8,484/year for the next 20 years.  Although this does not completely mitigate the problem of Medicare inflation, it reduced the share of Medicare/IRMAA costs from 26% - 37% to 14% - 19%.  

In the original scenario the net social security benefit from age 65 to 90 was $689,894.  In the revised scenario with an annuity included, this increases to $868,058, a 26% increase.  

Other annuity options, including those indexed to an equities market could further mitigate the inflation of Medicare and IRMAA.

Conclusion

It should be noted that careful income planning will be required to ensure that any income from an annuity (which is considered in the IRMAA income calculation) does not push you into a new IRMAA threshold.  Also, if you are considering Roth conversions or any other income planning strategies, they will also have to be carefully considered.  

The examples given were for a relatively high-income earner.  But as the as the SSA has published, half of households 65 and older, “receive at least 50 percent of total family income from Social Security and about one-quarter of the aged live in households that receive at least 90 percent of family income from Social Security” (Irena Dushi, 2024).  Annuities are a possible solution for not only high income earners, but those who rely in large part on social security benefits.  As always, working with a trusted advisor is always key in maximizing retirement income and minimizing IRMAA surcharges and taxes.  

References

Annese, M. (2024, August 21).

Healthcare Retirement Planner: Annese, M. (2024, August 21). Medicare IRMAA the History and Possible Future. Retrieved from Healthcare Retirement Planner

Irena Dushi, H. M. (2024, August 22).

Social Security Administration: Administration:https://www.ssa.gov/policy/docs/ssb/v77n2/v77n2p1.html

Social Security Administration. (2024, August 21).

Estimates Under the 2024 Trustees Report. https://www.ssa.gov/OACT/TR/TRassum.html

Vankar, P. (2024, August 21).

Annual percentage increases of average monthly Medicare Part B premiums in the U.S. from 2003 to 2022. https://www.statista.com/statistics