If you asked Americans, retired or within five years of retiring, where their retirement income will come from, most would mention Social Security. After all, we have spent our working years paying into Social Security. In fact, Social Security benefits make up all, or nearly all, of the household income for 33 percent* of Americans receiving benefits.
Social Security is complex and confusing. It is hard to know what information we hear is correct and what is speculation. Well, knowledge is power. We want to help clear the air on information surrounding Social Security benefits. Let’s start with something positive.
Beginning in 2022, American’s receiving Social Security benefits will see the largest increase in monthly benefits in 4 decades. The Cost-of-Living Adjustment (COLA) for 2022 is 5.9 percent. It is much needed as we have experienced a significant increase in inflation over the last year. The COLA is tied to the Consumer Price Index (CPI) and changes from year to year. Over the past 15 years, there have been three years where there was no COLA increase at all.
One of the biggest challenges facing retirees is determining when to begin receiving Social Security benefits. Fear that the Social Security system is broken fosters a sense of urgency to take benefits as soon as you are eligible at age 62. Take note that taking Social Security sooner rather than later comes with a lifetime penalty – a permanent reduction in benefits. Someone born in 1959 and beginning benefits at 62 will have a 29.17 percent reduction in their monthly benefit. For example, if an individual at their Full Retirement Age (FRA) of 66 years and ten months is eligible to receive $1,000 monthly, the benefit will be reduced to $708 at age 62. This would also impact a spouse who would receive a spousal benefit. The spousal benefit would be reduced by 34.17 percent. The spousal benefit of $500 would be reduced to $325 monthly.
On the flip side, an individual is rewarded for waiting to begin benefits with an 8 percent increase every year that benefits are delayed between the FRA and age 70. This is a significant increase in monthly benefits. In this situation, the spousal benefit is not impacted. The maximum spousal benefit is 50 percent of the earners’ benefit at FRA. However, a surviving spouse would benefit from the higher delayed benefit of a deceased spouse.
As longevity increases, it is essential to maximize Social Security for you and your spouse. This requires planning. Every situation is unique to an individual or family. Income from other sources, access to assets in retirement accounts and non-retirement accounts, monthly expenses, and more will affect a Social Security maximization strategy. A financial and retirement plan with Smedley Financial will help you get the most from your Social Security benefits.
Finally, Social Security fraud is on the rise. You should be proactive in protecting your Social Security benefits. Go online to www.ssa.gov and establish your online account before a fraudster takes control of your information and your benefits. If someone steals your Social Security identity, it is extremely difficult to access your account and remove the bad actor.
If you haven’t started your financial and retirement plan or updated it in a while, please reach out to our Wealth Management Team.
I wish you and your family a wonderful holiday season filled with family and friends.
