On October 10, the Social Security Administration officially released the amount of their cost-of-living adjustment for 2020. Almost 70 million Americans will see their Social Security benefits rise by 1.6% next year.
While this raise is less than the 2.8% cost-of-living-adjustment for 2019, it’s still higher than the 1.4% average COLA that participants have received over the past decade. The Senior Citizens League was also spot on with its projection for Social Security next year.
Social Security, a Crucial Retirement Decision
Social Security is one of the best benefits that you can get for retirement. Your monthly payments are guaranteed by the full faith and credit of the U.S. government, which makes this program one of the safest sources of income on earth.
There is also a built-in cost-of-living-adjustment to offset inflation. However, it’s designed to only replace about 40% of pre-retirement income, according to the Social Security Administration. As a result, those who intend to depend solely on this income often find themselves caught financially between a rock and a hard place.
If you are trying to decide when you should start taking Social Security, there are several different factors to consider.
When Should You Claim Social Security Retirement Benefits?
One of the most important details to plan for is when you want to quit your job. If you plan on working until you are at least 70, then it would probably be wise to delay Social Security until you reach the maximum retirement age.
You can increase your total monthly benefits by about one-third this way, or by 8% per year for each year you wait.
And if you decide to start taking Social Security early while you continue to work? Then your benefits will be reduced on a dollar-for-dollar basis if your income exceeds a certain threshold until you reach full retirement age.
Social Security expert David Frietag estimates the decision of when to start benefits can impact your retirement plan by hundreds of thousands of dollars. It could even make a million-dollar difference in some cases for high-income earners.
The Influence of Health and Other Factors
But claiming Social Security early may be wise if you have health conditions or other factors that could mean a shorter lifespan.
It may also make sense if you are adept at investing and can generate significant revenue using your monthly benefits as principal.
The Center for Retirement Research reports that over 40% of men and nearly half of all women begin claiming benefits at age 62. This is the earliest age that you can claim benefits under any circumstances. But claiming benefits early comes at a cost.
If your full retirement age is 67 and you claim benefits at age 62, then you will reduce your monthly lifetime benefit by 30%. But this may still make sense for retirees who will receive a public pension once they reach a certain age but are then ineligible to receive Social Security benefits.
If they claim early, then they can receive benefits for a few years before their pensions begin.
Coordinate Social Security with Other Retirement Decisions
It's also vitally important for you to coordinate when you begin taking benefits with your spouse if you are married. There are literally hundreds of different ways and times that you can choose.
Be sure to talk to a qualified retirement planner or Social Security expert before you finalize your plans. If you make a miscalculation here it could conceivably cost you hundreds of thousands of dollars in lost benefits. Make sure to collaborate on this issue with your spouse before choosing a specific alternative.
You will also need to coordinate your retirement savings with your Social Security payout as well as your job if you continue to work. If you are able to work until you turn 70, then you may not need to tap into your savings until then.
The longer you are able to wait to begin drawing on your savings, the more money you will have at your disposal when you finally do stop working.
This also gives you the chance to save more for retirement through your employer-sponsored retirement plan (and other accounts). You also reduce the time that you will have to make your savings last.
Maximize Your Social Security Benefits with Financial Guidance
Don't hesitate to enlist the help of a qualified financial professional or retirement planner if you need to.
They may have ideas and resources to help you that you haven't thought of. They can plug your income numbers into a sophisticated software program that can analyze a range of options, showing effective ways to manage your assets and elect for your benefits.
Many financial planners today say that you should draw no more than 3% of your retirement savings each year. It's crucial that your portfolio is properly balanced between debt instruments and equities -- and possibly even other vehicles, if right for you. You need to maintain a guard against inflation while generating sufficient income to live on.
Annuities can be another way to build a dependable, guaranteed stream of income. Fixed index annuities can also provide superior growth in many cases.
Don't Forget the Effect of Taxes on Your Benefits
Also be sure to examine the tax impact of your Social Security benefits.
If you elect to begin receiving benefits while you are still working, then up to 85% of your benefits may be taxable as ordinary income. Not only that, they may be reduced by a certain amount based on your take-home pay.
Of course, at least some of your benefits may still be taxable if you have a pension or other source of income in addition to your Social Security benefits.
You may want to consider converting some or all of your retirement plan balances into a Roth IRA while you are still working and can afford to pay the taxes. This will effectively lower your taxable income during retirement. It can also help prevent your Social Security benefits from being taxed.
Count on Social Security in Your Income Plan
The 1.6% increase in Social Security benefits for 2020 will effectively help retirees to keep pace with inflation in their budgets. Although the long-term future of Social Security is unclear, it's fiscally sound at this point and can form the basis for your retirement plan.
Just be sure to do your homework so that you can maximize your benefits over time.
Need Help with Maximizing Your Benefits?
Do you need help maximizing your benefits? Not sure about how Social Security benefits fit in with the rest of your retirement strategy?
No worries. Personal guidance and peace of mind are only a click away at Jennifer Lang Financial Services. Contact us today.