What Should I Know About My Cost-of-Living Adjustment for Social Security?

Since Social Security is important for most retirees, in this video, Janel and Tim talk about a few retirement situations and how this might impact your future financial plans. The situations discussed in the video include someone who:

• Has retired and already collecting Social Security
• Retired and has not started collecting Social Security
• Is still working but able to start collecting Social Security
• Is about to retire

Video Transcript:

You may have heard that Social Security benefits are getting an 8.7% pay raise in 2023. This is a good news, bad news situation though. While everyone loves pay raises, this one comes on the heels of record-setting inflation.  

Since Social Security is important for most retirees, let’s talk about five situations and how this might impact financial plans. Tim, how does this impact a person who is already retired?

Sure, Janel. For retirees already collecting Social Security, there isn’t much to do. Just keep an eye on your January payments to make sure you see the increase. Don’t expect a full 8.7% though since you need to account for adjustments like Medicare premiums or tax withholding. This increase might impact your taxes though. So, when you meet with your tax professional to prepare your 2022 returns, you might want to ask how this increase could impact your 2023 taxes.

If you’re retired and have not started SS, you might view this announcement as a “sign” to stop waiting and start collecting. We urge you to avoid that temptation. Remember, between ages 62 and 70, you receive an 8% pay raise in your SS check for each year you wait to collect. And that 8% is on top of any cost-of-living increases. We can model different Social Security claiming strategies to see how timing might impact your lifetime benefits. In some cases, the wait can mean tens of thousands of dollars in additional benefits over time.

That’s great advice, Tim. Now, let’s talk about folks who are working part-time or thinking of getting a part-time job in order to keep up with inflation. If you start your SS benefits before your full retirement age and continue to work, you are subject to the Earnings Test. Simply put, the Earnings Test is an attempt to prevent folks from applying for SS before they actually retire. For every $2 you earn over the limit, $1 of your SS benefit is withheld. It’s important to note that this is a withholding of benefits, not a forfeit. You’ll recoup those forfeited funds once you hit your FRA and your benefit is recalculated. Like SS benefits themselves, the earnings limit has increased for 2023.

For some folks who are already collecting but thinking about picking up a part-time retirement gig to combat inflation, this withholding might be worth it. But if you are over age 62 but not yet collecting, I’d caution you against seeing this as a reason to apply sooner. If you’d like to run scenarios for collecting while continuing to work, schedule a coaching session. Hey Tim, can you offer some advice for folks who are still working full-time but are thinking about retiring in the not-too-distant future?

Sure thing, Janel. If you can see the retirement light at the end of your career tunnel, this increase could be almost too good to resist. But this is when we need to be most careful. Remember, this increase isn’t all good news. It’s the result of higher inflation and comes in the midst of recession speculation. Both are bad news for new retirees. So, before you hand in your notice and start planning your retirement party,  be sure you’ve prepared for whatever financial downturns might be on the horizon.

Planning is so important. For folks in their 50s and early 60s, this market downturn probably has you crumbling your retirement plans and tossing them in the circular file. But try not to despair. Many folks felt the same way in the midst of the 2008 financial crisis. While it didn’t seem so at the time, stocks did bounce back after the Great Recession. Having a long-term plan, financial discipline and a little bit of faith and courage may just see you through. Remember, tough times don’t last but tough investors do.

I hope these examples demonstrate how this 8.7% SS pay raise impacts folks in different retirement stages. But odds are your situation is a little different than any of those we’ve discussed here. So, we invite you to reach out.