by Stephen Reed | Accounting News, News, Newsletter, Social Security
As we approach 2025, several significant changes are on the horizon for Social Security beneficiaries. From cost-of-living adjustments (COLA) to shifts in the full retirement age (FRA), these updates will impact millions of Americans who rely on Social Security as a crucial part of their retirement income. Understanding these changes is essential for retirees and those nearing retirement to ensure their financial plans remain on track.
Cost-of-Living Adjustment (COLA) for 2025
One of the most anticipated updates to Social Security each year is the cost-of-living adjustment (COLA). This adjustment is intended to keep benefits in line with inflation, helping retirees maintain their purchasing power despite rising prices.
For 2025, however, retirees are likely to receive a smaller COLA than in recent years. After historically high adjustments in 2022 and 2023—8.7% and 3.2%, respectively—due to surging inflation, the rate of increase is expected to moderate as inflation cools. While the exact percentage will be determined by the inflation data from the third quarter of 2024, early estimates suggest that the 2025 COLA could be around 2-3%. This smaller increase could surprise retirees who have grown accustomed to more substantial adjustments recently.
Higher Full Retirement Age for 2025
Another critical change coming in 2025 is a further increase in the full retirement age (FRA). The full retirement age is the point at which retirees can claim 100% of their Social Security benefits. For those born in 1959, who are turning 66 in 2025, the FRA will be 66 years and 10 months. Comparatively, those who turned 66 in 2024 reached FRA at 66 and eight months. For those who turn 66 in 2026 and beyond, FRA will be even later, at 67 years old. This means future retirees need to carefully consider their retirement timing, as claiming benefits before reaching the full retirement age results in a permanent reduction in monthly payments.
Planning Ahead for Future Changes
The adjustments in 2025 signal an ongoing trend that retirees and those nearing retirement should be aware of. Not only is the FRA gradually increasing, but future COLA increases are also expected to be modest.
Given these changes, retirees should plan for a scenario in which their Social Security benefits do not keep pace with inflation as strongly as they might have hoped. This is especially important in an economic environment where healthcare costs and other living expenses can rise rapidly. Financial advisors often recommend that retirees consider diversifying their income sources and not relying solely on Social Security for their retirement needs.
The Social Security changes coming in 2025 may not be as dramatic as some recent adjustments, but they highlight the importance of understanding how these shifts can affect your financial future. Whether you’re approaching retirement or already receiving benefits, staying on top of these changes can help you make informed decisions and better prepare for the years ahead.
by Daniel Kittell | News, Newsletter, Retirement, Retirement Savings
As you approach retirement, understanding your Social Security benefits becomes crucial for financial planning. Your benefit amount hinges on factors like earnings history and age at sign-up. With careful planning and strategic decision-making, you can maximize your Social Security benefits to ensure financial stability in your golden years. Here are proven strategies to help you make the most out of your Social Security benefits.
Delay Your Claim
One of the most effective ways to increase your Social Security payments is by delaying your claim beyond your full retirement age (FRA). For each year you delay claiming benefits, your payments could increase by up to 8%, until you reach the age of 70. After age 70, there is no additional benefit for waiting to claim benefits.
Stay in the Workforce Until FRA
You can begin collecting Social Security payments at age 62. However, opting for this early withdrawal results in reduced monthly payments, while waiting until FRA provides higher monthly payments.
FRA is age 66 for those born between 1943 and 1954, gradually increasing in two-month increments thereafter. Individuals born in 1960 or later reach FRA at age 67. Claiming benefits before you reach FRA results in a permanent deduction.
Maximize Earnings
Be strategic about when you earn your highest income. Since Social Security benefits are based on your highest 35 years of earnings, consider working overtime, asking for a raise, taking on side jobs, or seeking higher-paying jobs in the years leading up to retirement.
There is a maximum earnings threshold – adjusted each year for inflation – which is used to calculate Social Security benefits. In 2024, earnings up to $168,600 are used to calculate retirement benefits. However, any income beyond this threshold isn’t subject to Social Security tax and won’t influence future benefit payments in retirement.
Claim Spousal Benefits
Married individuals have the option to claim spousal benefits based on their spouse’s work record, which can be up to 50% of their spouse’s benefit amount. This can be particularly advantageous if one spouse has significantly higher earnings. The lower-earning or nonworking spouse needs to sign up for spousal payments at his or her FRA to get the 50% spousal payment. The percentage is reduced if this spouse starts benefits before their FRA.
Coordinate Spousal Benefits
Spouses can strategize to maximize their combined Social Security benefits by coordinating when each spouse claims their benefits. This may involve one spouse delaying their claim while the other claims benefits, allowing the delayed benefits to grow.
Know Retirement Earning Limits
If you claim Social Security before reaching FRA and continue to work, a portion of your benefit might be temporarily withheld.
In 2024, Social Security recipients under FRA earning over $22,320 will see $1 withheld for every $2 earned beyond this threshold. At full retirement age, the earnings limit rises to $59,520, with a penalty reduction to $1 withheld for every $3 earned above this limit.
Upon reaching full retirement age, you can work while receiving Social Security without penalty. Your benefit will be recalculated, accounting for any previously withheld payments and your ongoing earnings.
Minimize Social Security Taxes
Be aware of the tax implications of your Social Security benefits. Depending on your adjusted gross income, a portion of your benefits may be subject to federal income tax. Careful strategizing, like minimizing other sources of taxable income, can help reduce the taxation of your Social Security benefits.
Maximize Survivor’s Benefits
Surviving spouses are entitled to receive the higher of their own benefit or their deceased spouse’s benefit. If your spouse received the higher benefit, you might qualify to claim your spouse’s survivor benefit initially, letting your own benefit accrue, and then transitioning to your benefit later in life. By understanding the rules surrounding widow/widower benefits, you can ensure you receive the maximum amount possible.
by Jean Miller | Accounting News, News, Newsletter, Social Security
As of January 1, 2024, a series of Social Security changes took effect, influencing both the benefits received by beneficiaries and the eligibility criteria. Whether you’re currently a beneficiary or in the process of applying this year, you’ll want to be aware of these significant changes. In this article we’ll go over the most important points to know.
New Year, Bigger Checks
Annually, the Social Security Administration (SSA) implements a cost-of-living adjustment (COLA) to ensure beneficiaries can keep up with rising expenses. The adjustment considers the percentage shift between average prices in the third quarter of the present year and the third quarter of the preceding year.
The COLA for 2024 is 3.2%, so monthly payments for recipients increased by that amount beginning in the new year. According to the SSA, that’s an average monthly increase of about $50.
When it comes to the timing of your payment, it still depends on your date of birth, adhering to Social Security’s standard payment schedule. Typically, if your birthday falls within the first through 10th day of the month, your payment will be processed on the second Wednesday. For those with birthdays between the 11th and 20th day of the month, payments are scheduled for the third Wednesday. If your birthday occurs after the 20th day of the month, you can expect your payment on the fourth Wednesday.
New Year, High Social Security Taxes
Because the Social Security tax wage base also increased by 5.2%, wealthy taxpayers could be subject to higher taxes. The Social Security tax wage base for 2024 is $168,600, which is up from $160,200. This means that some workers will be paying about $521 more in Social Security taxes than they would have paid if the wage base didn’t increase. Additionally, self-employed workers are taxed at 12.4%, meaning they could owe an extra $1,041.60.
Full Retirement Age and the Earnings Test
There are two significant factors to be mindful of when it comes to Social Security benefits: full retirement age (FRA) and the earnings test.
While you can begin receiving benefits as early as age 62, you become eligible for full benefits upon reaching the FRA, determined by your birth year.
For instance, if you were born in 1962, you would reach your FRA at 67 years old. However, if you were born in 1964, your FRA would be 67 years and 8 months, requiring an additional eight months of patience compared to those born in 1962. This illustrates how FRA varies based on the year of birth, impacting when individuals become eligible for full Social Security benefits.
As for the Social Security earnings test, this becomes relevant if you’re still working and earning income while receiving Social Security and have yet to hit FRA (it’s also why many experts suggest holding off until FRA).
Essentially, surpassing a specified income threshold triggers the SSA to withhold a certain amount above that limit. In 2024, for workers who won’t reach FRA the entire year, the earnings test cap is $22,320. This means $1 in Social Security benefits will be withheld for every $2 in earnings that exceed $22,320. For workers who will reach FRA at some point during the year, the earnings test cap is $59,520. This means $1 in Social Security benefits will be withheld for every $3 in earnings that exceed $59,520.
Keep in mind, this is just a temporary hold. Once you hit FRA, your benefit checks will factor in those temporary withholdings. Also note that earnings from investments or payouts from retirement plans, for instance, are not considered in the earnings test.
by Stephen Reed | Accounting News, News, Newsletter, Retirement, Retirement Savings
Retirement should be a time to finally relax, but concerns about depleting savings can cast a shadow over your golden years. In this article, we’ll delve into smart money moves that can help ensure a more secure and comfortable retirement.
Set Up a Safe Withdrawal Rate
A safe withdrawal rate is the percentage of your retirement savings that you can tap into annually without risking running out of money during your lifetime. A common strategy is the 4% rule, which suggests withdrawing 4% of your retirement savings each year, creating a sustainable income stream while preserving your principal. This approach takes into account market fluctuations and adjusts your withdrawals accordingly. For example, in thriving market conditions, you might withdraw a bit more, while in downturns, you might cut back.
Diversifying your investments is another key factor in managing the safe withdrawal rate. A well-balanced portfolio can help mitigate risks and generate returns, ensuring that your retirement savings remain resilient over time.
Delay Social Security
You are eligible to receive your full Social Security benefit, determined by your individual earnings history, upon reaching full retirement age (FRA), which varies depending on your birth year. However, opting to postpone your application beyond FRA offers the advantage of increasing your monthly benefits by 8% annually, up to the age of 70.
While an increased Social Security benefit doesn’t necessarily ensure your savings won’t deplete, the extra funds each month would contribute to preserving your savings and maximizing your overall retirement income.
Annuities
Annuities are financial products designed to provide a steady income stream during retirement. They can be an excellent option for those worried about outliving their savings. Annuities come in various forms, such as immediate annuities and deferred annuities, each offering distinct advantages.
Immediate annuities involve a lump-sum payment in exchange for guaranteed monthly payments for life. This can be a reliable way to secure a fixed income stream, regardless of market fluctuations. Deferred annuities, on the other hand, allow you to invest a sum of money that grows over time and is converted into periodic payments later in retirement.
Annuities provide a predictable cash flow, but be sure to carefully evaluate the terms and conditions, fees, and potential risks associated with them before making a decision. Also keep in mind that, unlike Social Security, annuities work on a fixed amount and don’t adjust with inflation. Consulting with a financial advisor can help you navigate the complexities and choose an annuity that aligns with your financial goals.
Securing a worry-free retirement requires thoughtful planning and smart financial strategies that are tailored to your unique circumstances. Consult with a financial professional to ensure that your retirement plan aligns with your long-term goals.
by Stephen Reed | Accounting News, News, Social Security
According to the Social Security Administration, the last 12 Trustees Reports, which report annually on the current and projected financial status of the Social Security program, indicated that reserves will be drained between 2033 and 2035. If that happens, scheduled tax revenues will be adequate to pay only about three-fourths of the scheduled benefits. Here are some of the legislative measures that policymakers have proposed to address the issue.
Raise the Retirement Age
One proposal is to gradually increase the retirement age. Currently, the retirement age is set at 67 for those born in 1960 or later. The proposal would increase the retirement age to 68 over the next decade, and eventually to 70 for people born in 1978 or later. Proponents of the increase claim that it would reflect longer life expectancies and help to ensure the program’s long-term sustainability. Critics of the increase argue that this would disproportionately affect low-income and blue-collar workers who have physically demanding jobs and may not be able to stay in the workforce as long.
Increase Payroll Tax Rate
The payroll tax rate funds Social Security. Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $160,200 (the self-employed pay 12.4 percent). Under this proposal, the tax rate would gradually increase over the next decade, thereby garnering more revenue for the program. Advocates of this approach assert that it would be a fair way to fund the program, as it would require higher earners to pay more into the system. However, those against this move argue that it could discourage economic growth.
Invest in Private-Sector Stocks and Bonds
Social Security funds are invested in special-issue government bonds, and these bonds have a lower rate of return than stocks or other investments. Proponents of this move argue that investing Social Security funds in a diversified portfolio of stocks and bonds could potentially earn higher returns and increase the program’s financial sustainability. Critics point out the obvious risks and market volatility associated with investing in the stock market.
Change the Way Benefits Are Calculated
Social Security Benefits are based on a worker’s highest 35 years of earnings, adjusted for inflation. One proposal is to implement a formula that is less generous to higher earners. While this could address Social Security’s regressive aspects, where higher earners receive more benefits than lower earners, critics argue that this could disincentivize workers to increase their earnings and could dissuade entrepreneurship.
Invest in Private IRAs and Savings Accounts
Finally, some lawmakers have recommended creating individual retirement accounts (IRAs) or other private savings accounts as alternatives to Social Security, allowing individuals to invest a portion of their earnings in the stock market or other investments. While this would grant individuals more control over their retirement savings, and could potentially earn higher returns than the Social Security system, critics point out that private accounts expose individuals to market volatility, and that the Social Security program provides a safety net for individuals who may not have the means or knowledge to invest in private accounts.
