Starting on January 1, 2021, Social Security beneficiaries will see a boost in their benefits. Over 70 million recipients of Social Security and Supplemental Security income will receive a COLA bump of 1.3% in their monthly payouts.
This increase is lower than the increase of 1.6% for 2020 by 0.3%. It's also 0.1% lower than the average COLA of 1.4% that recipients have received over the last decade.
The average Social Security recipient will see a monthly bump-up of about $20 overall. In other words, that will be an increase from an average benefit of $1,523 in 2020 to $1,543 in 2021.
How Are Social Security Benefits COLAs Calculated?
The COLA adjustment that is applied each year is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This consumer price index is calculated by the Bureau of Labor Statistics (BLS).
If the CPI-W increases more than 0.1% year-over-year between the third quarter of the previous year and the third quarter of the current year, Social Security will raise benefits by the same amount.
The precise calculation is fairly complex. It may result in a new benefit amount that differs slightly from the amount that is derived by multiplying the new COLA by the current benefit amount.
2021 Social Security Withholding Rates and Limits
In 2021, the Social Security tax of 6.2% will be levied on all earned income up to $142,800.
This marks an increase of $5,100, or 3.7% from the limit of $137,700 in 2020. Any amount that is earned above this limit is exempt from this tax.
The tax rate of 6.2% will remain unchanged, just as it has for the past several years. Those who are self-employed are still required to pay the full amount of 12.4% on all of their net earnings up to the limit.
But just as the maximum amount of money that is subject to the Social Security tax has increased, so will the amount of the maximum possible Social Security benefit, from $3,011 in 2020 to $3,148 in 2021.
2021 Changes for Taking Benefits While Still Working
What if you are collecting Social Security benefits while you are still working? A percentage of your benefits may be withheld until you reach your full retirement age if your earned income exceeds a certain amount.
This amount has increased slightly for 2021. Before reaching full retirement age, you will be able to earn up to $18,960 in 2021.
After that, $1 will be deducted from your payment for every $2 that exceeds the limit. The 2021 annual limit represents an increase of $720 over the 2020 limit of $18,240.
If you reach full retirement age in 2021, you will be able to earn $50,520. That is up $1,920 from the 2020 limit of $48,600.
For every $3 you earn over the 2020 limit, your Social Security benefits will be reduced by $1. But that will only apply to money earned in the months before hitting full retirement age.
Once you reach full retirement age, no benefits will be withheld if you continue to work, regardless of your level of earnings.
When Will You Know Your Exact Benefits for 2021?
The Social Security Administration will notify you of the exact amount of your new benefit sometime in December. However, they can’t give this amount until the amount of the new Medicare premiums for 2021 is made public.
Social Security retirement benefits are one of the safest sources of income on earth. They are backed by the full faith and credit of the U.S. Government.
However, according to the Social Security Administration, they are only designed to replace about 40% of the recipient's income that they received during their working years.
Therefore, those who depend solely on this source of income usually end up finding themselves with too much month at the end of their money.
When Should You Collect Social Security?
If you are trying to determine when the best time would be for you to begin collecting Social Security benefits, there are several factors that must be taken into account.
One of the most important questions is when you would like to stop working.
If you plan on working until you are at least 70 years old, then you might think about delaying your Social Security benefit until then. That way you can receive the maximum possible benefit.
What Are the Benefits of a Delayed Claiming Strategy?
Waiting until you are 70 to collect your benefits means that you will receive a benefit that is 32% higher than the benefit that you would have received if you had started collecting it at your full retirement age.
Each year you defer taking your benefit past full retirement age, your benefit accrues roughly another 8%.
This decision becomes even more complicated if you are married. Both you and your spouse must figure out a joint issue that can have far-reaching financial ramifications.
What About Claiming Social Security Early?
But by the same token, consider starting benefits before your full retirement age if you are in poor health or have a family history of limited longevity.
It's better to collect a reduced benefit now than to end up getting little to nothing in the end by waiting for too long. This may also be a good idea if you are confident that you can generate a higher return by investing the reduced amount now and letting it grow.
How Does the Timing of Your Decision Affect Your Benefits?
The Center for Retirement Research shows that about half of Americans begin collecting Social Security at age 62. However, this strategy results in a benefit that is 30% less than what they would have received had they waited until full retirement age.
If you are unable to determine when the best time would be for you to begin collecting your benefits, don't hesitate to enlist the help of a qualified financial professional or planner.
They will probably have software programs that can calculate the best age at which to begin collecting benefits based on a number of variables.
Those include your life expectancy, how long you intend to keep working, the projected COLAs of your monthly benefit going forward, and so on.
Social Security, a Crucial Retirement Decision
Just don't leave this decision to chance. It could make a difference of hundreds of thousands of dollars in your pocket over the course of your retirement if you make a misstep here.
You also need to take into account your retirement savings and the rate of return that it could generate for you over time.
Coordinate Your Retirement Portfolio with Social Security
Be sure that your portfolio is well-balanced between equities and fixed-income instruments so that you are taking the right types and the right amounts of risk. And don't forget to take taxes into consideration.
If your income exceeds a certain level, then a portion of your Social Security benefits will become taxable. Just don't let this issue dictate your whole retirement plan. Your tax "tail" shouldn't wag your entire financial "dog.”
The amount of money that you withdraw from your retirement savings is another important factor to consider. Most financial planners today will tell you not to take out more than 3-4% of your savings per year.
Cover Retirement Income Gaps
Drawing down your assets too quickly can be a critical mistake. Make sure that your assets will last as long as you do. One of the ways you can do this is by using an annuity that pays you a stream of guaranteed lifetime income.
Consult your financial advisor for more information on Social Security and retirement planning and how an annuity could benefit you.