“As highlighted by a recent Nationwide Retirement Institute poll, most Americans are woefully lacking in basic Social Security knowledge. This education gap can result in mistakes that will impact your entire life.”- Ken Reeves.
By Ken Reeves
When discussing Social Security, there is a demonstrable and concerning lack of education among working Americans. Since Social Security is the cornerstone of most retirement plans, failure to close this widening knowledge gap may result in people making mistakes with Social Security that could negatively affect their retirement. So, what fundamentals of Social Security should You know if you plan on retiring in the next few years?
Like other government programs, Social Security can indeed be complicated and challenging to decipher. No one expects anyone who isn’t a qualified retirement planner or another financial professional to know all its many rules and regulations. However, even working with a knowledgeable advisor, you should still grasp Social Security fundamentals. Doing so lets you know the right questions to ask your planner.
For instance, you’ll want to know the requirements for eligibility. You must have earned at least 40 retirement credits to receive Social Security payments. In 2022, Americans will gain a Social Security or Medicare credit for each $1,510 they make annually. To get the maximum four credits available for the year, you’ll need to earn $6,040. You must also have paid into the system for at least ten years and be 62 or older. Beyond understanding eligibility rules, you should also know some other Social Security planning elements.
Your “full retirement age” or FRA.
FRA is when you’ll get your full Social Security benefit. As you can see in the chart from Social Security, this age is different depending on when you were born. While it generally yields more significant benefits for most people, waiting until the full retirement age may not be the ideal choice for everyone. Your best age may be different than that of a relative, friend, or colleague depending on numerous factors such as health, family history, pensions, savings, or qualified plans you have.
As I said, the soonest you can claim Social Security benefits is 62. But, you will not be receiving your full benefits. Choosing early payments means settling for a significantly smaller payout for the rest of your life. Many people I meet mistakenly believe that even if they claim benefits at 62, they’ll be automatically bumped up to 100% as soon as they reach full retirement age. That is false.
When you look at the chart again, you can see a concrete cost for not waiting. For example, if you were born in 1960 or later, you’ll lose 30% of your benefit and will not receive the bonus you get by waiting until age 70. Your annual check could be impacted by as much as 77%! By waiting until three years past your FRA to collect, you’ll get an additional 8% added.
Unfortunately, humans don’t come with expiration dates.
None of us knows with any certainty when we’ll die, become ill, or we’ll have to leave work sooner than expected. The best thing you and your retirement income planner can do is to take some extra time strategizing for Social Security. You’ll need to examine your current health, family history, investments, savings, retirement accounts, lifestyle goals, and other factors. The critical thing to remember here is that you do not want to decide at the last minute.
Bad news for those born in 1960?
If you were born in 1960 and want to file for benefits when you turn 62 in 2022, you might be in for an unpleasant surprise. Due to the somewhat quirky math Social Security uses to calculate benefits, your check may be smaller than anticipated.
These smaller payments result from reduced wages Americans experienced during the pandemic. Since many people could not work or worked reduced hours during the pandemic, less payroll tax went into Social Security, impacting people turning 62 in 2022. According to experts, a 15% decline in economy-wide average wages could potentially result in a benefits reduction of close to 13%. Some financial experts predict that retirement period losses for those born in 1960 could top $70,000! If you were born in 1960, you should speak with an advisor as soon as possible to discuss this issue. You may discover some tactics to offset your retirement’s negative impact.
COLAs provide some inflation protection.
People already on Social Security know that these benefits have some built-in inflation protection. Following federal law, the Social Security Administration addresses inflation annually with a cost of living adjustment or COLA. Current recipients, most of whom are over 65, have had their benefits increased nearly every year for the past forty years to help them keep pace with inflation.
When there’s lower inflation, Social Security’s COLAs are relatively modest. But, during increasingly inflationary times such as we’re now experiencing, the COLAs become significantly larger. A few days before this article was written, the SSA announced that Social Security income payments would increase by 8.7% in 2023, based on the Department of Labor’s Consumer Price Index for Urban Wage Earners and Clerical Earners. (CPI-W) Increased SSI payments start on December 30, 2022. This is the most significant COLA increase since 1981 and highlights that government efforts to curb inflation have not worked.
How is the cost of living increase calculated?
Even though COLAs can seem serendipitous and perhaps politically motivated, the Social Security payments increase is math-based. This has been the case since 1972, when President Richard Nixon signed a law that yearly increases must be tied to consumer prices.
Since then, the Bureau of Labor Statistics (BLS) has compared the average price index for working people for July, August, and September of the current year to that of the previous year. The percentage of change between the two periods then becomes the COLA. If there is no change in the index, there is no COLA for that year. Because post-pandemic inflation had begun to rise at the end of 2020, 2021 saw a 5.9% COLA. But inflation persisted, resulting in the current 8.7% bump. In 2023, the average Social Security recipient will see approximately $144 added to their monthly payments. Unfortunately, most experts believe that amount may do little to blunt the impact of inflationary increases, which show no sign of slowing down.
Summing it up:
When it comes to Social Security, assuming that things will just fall into place once you’ve reached the eligibility age might be a huge mistake.
Social Security is one of the most critical elements to consider if you want a more prosperous and less stressful retirement. Rather than leaving Social Security planning to chance, it’s vital that you learn the basics, partner with a seasoned financial professional, and create an action plan based on your unique situation. While there is no “perfect” Social Security protocol, you can take measures to increase your chances of a successful retirement. My office specializes in assisting seniors in sorting through the myths and misinformation surrounding Social Security benefits. Contact me today if you’d like to discover more about how to more efficiently and effectively incorporate Social Security benefits into your retirement matrix. (205) 235-2030
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