by Pete McAllister | Accounting News, News, Retirement, Social Security
Retirees are feeling the effects of soaring inflation, and it’s stretching their budgets. More than 70 million retired Americans depend on a Social Security benefit program as a source of income, especially during economic downturns, so annual changes to payouts are always expected. Read on to learn what’s in the cards for Social Security benefits next year, including a higher payout.
COLA Boost
Get ready for a historic increase to 2023’s cost-of-living adjustment (COLA). 2022 saw an adjustment of 5.9%, which was already uncommonly high, but in 2023 monthly checks will increase by 8.7%. That’s approximately $146 per month ($1,752 per year) for the average retiree. This is the highest COLA increase since 1981. All retirees currently receiving Social Security benefits will see this increase in January of 2023.
Maximum Taxable Earnings Will Increase
Due to an increase in average wages, Americans will see more Social Security taxes taken from paychecks in 2023 because more of their income will be liable for the tax. Maximum earnings subjected to Social Security taxes will increase from $147,000 in 2022 to $160,000 in 2023. This means that workers paying into the system are taxed on wages up to this amount, typically at the 6.2 percent rate.
Maximum Social Security Benefit Also Set to Increase
The maximum benefit for retired workers who claim Social Security at full retirement age — which is 67 for anyone born after 1960 — will be $3,627 in 2023, up 8.4% from $3,345 in 2022. Take note that the maximum benefit will be different for those who claim benefits before the full retirement age, and the same can be said for those who claim benefits after the full retirement age. For instance, if you begin claiming benefits at age 62, your maximum monthly benefit in 2023 will be $2,572. On the other end of the spectrum, if you begin claiming benefits at age 70, your maximum monthly benefit in 2023 will be $4,555.
Work Credits Will Be Harder to Reach
In order to earn retirement benefits, workers must accumulate at least 40 work credits during the whole of their careers. The maximum number of credits eligible to be earned per year is four, and the value of each credit fluctuates from year to year. In 2023, a single credit will be worth $1,640, up from $1,510 in 2022. Thus, workers will need to earn more income in order to collect the credits they need to retirement benefits.
by Jean Miller | Accounting News, News, Retirement, Retirement Savings
Although retirement planning often involves some guesswork regarding the future of the economy as well as each retiree’s individual circumstances, there are some general misconceptions to avoid in order to be sure you’re building a solid nest egg. We go through these common beliefs below so you are informed when setting goals for retirement.
The 4% Rule is Steadfast
The 4% rule has been regarded as a sound retirement distribution strategy for years. With this method, retirees withdraw 4% from their retirement portfolio during the first year of retirement. The amount then increases each year according to inflation. This method, in theory, should yield a consistent stream of income for at least a 30-year retirement. However, given market expectations—namely, lower projected returns for stocks and bonds—the general consensus is that the 4% rule be amended to 3.3%. This may seem like a small difference, but it could have a big impact on your standard of living. The difference would be even more evident later in retirement, when accounting for inflation.
You Can Live Off Social Security Benefits
Social Security will only replace about 40% of preretirement income. Given that retirees need to replace approximately 80% of preretirement earnings to prevent a significant reduction in quality of life, Social Security Benefits will fall way short of this mark. Make sure your game plan includes additional savings from investment accounts to cover the discrepancy.
You Can Start Withdrawing Social Security at 65 Years Old
When the Social Security Act was signed into law in 1935, it established age 65 as the full standard benefit age. Couple this with the fact that 65 is also the Medicare eligibility age, and Americans have long considered 65 to be the standard retirement age. However, while Medicare eligibility age remains the same, full retirement age (FRA) has since changed. Depending on a retiree’s birth year, their FRA can be anywhere from age 66 and four months to age 67. This means that if you start Social Security at 65 (before your FRA), you will be subject to early filing penalties that could slash a substantial portion of your monthly check. Be sure to check your online Social Security account to be informed of your FRA and the appropriate timeline for claiming benefits.
Saving 10% of Income for Retirement is an Adequate Goal
For decades, workers followed the rule of thumb to save 10% of their salary for retirement. However, longer life spans, lower projected market returns, and the declining value in Social Security benefits have all contributed to the need to save more. It’s important to work with a financial advisor to come up with a personalized plan for retirement goals, but at the very minimum, aim to save 15% to 20% of income.
Medicare Will Provide Sufficient Coverage for Care
Medicare often doesn’t provide enough coverage for seniors ages 65 and older. Factors such as high insurance costs and coverage exclusions contribute to the need for supplemental coverage, such as Medigap. And sometimes seniors find that a Medicare Advantage policy—the private insurance alternative to traditional Medicare—is a better fit. No matter what you ultimately decide, it’s crucial to devote specific funds to medical costs, either in a health savings account or another tax-advantaged retirement account.
by Jean Miller | Accounting News, News, Professional Services, Retirement
As you approach retirement you’re probably going to be asking yourself when to collect social security benefits. After all, the longer you wait, the more money you can secure. For instance, as long as you’ve paid into the program for 40 quarters (or roughly 10 years), you can start collecting as early as age 62, though full social security retirement age ranges from 65 to 67 for people born after 1943. If you can hold off a few more years, however, your benefit increases by about 8% every year until age 70.
Experts recommend that one thing to look at is whether or not you can afford to wait. Do you have financial flexibility with other assets that can cover your expenses, or do you need the extra monthly payment to keep with the lifestyle to which you’ve grown accustomed? If it’s the latter, you may be forced to withdraw sooner or make changes to your lifestyle. What about existing investments? If you collect early, your investments can grow longer, but they would have to grow by at least 8% a year just to equalize the loss from collecting early.
As you decide when to start withdrawing social security, take into account the age at which you’re planning to retire. If you’re still in the workforce when you become eligible to receive benefits, you can start collecting social security. However, there are some potential downsides to consider. For example, if you haven’t reached your full retirement age, you lose $1 for every $2 you earn above the $15,480.00 earning limit. Your benefits are recalculated to recover those lost benefits once you reach full retirement age, but it can take up to 15 years just to restore the loss.
Another consideration to look at is your marriage status. If you’re married, experts recommend that the higher earner in the marriage hold off on collecting benefits for as long as possible. However, it’s possible for the higher earner to file for benefits at retirement age and then suspend them, which could allow your spouse to collect a spousal benefit equal to ½ of your full retirement benefit. Meanwhile, your benefit continues to grow until age 70.
Lastly, consider your health. If you’re in poor health, you might be better off taking benefits early. According to the Social Security Administration, if you live to the average life expectancy for your age, you’ll get about the same amount of benefits no matter when you start collecting. The longer you live beyond that age, the more you’ll benefit by delaying payments.
With so many factors to consider, there is no “right” age to start collecting social security benefits, so just be sure that you’re making an informed decision when the time comes.
by Daniel Kittell | Accounting News, Fraud, IRS, News, Resources
While a majority of the population is covered by Social Security (SS) to some degree, many do not fully understand the program, resulting in frustration and confusion when it comes time to receive benefits. In an effort to curb miscommunication or misgivings, the Social Security Administration (SSA) has increased its informational output in recent years. The SSA’s 2017 fact sheet provided numerous statistics for future and current recipients, and we’ve outlined the top stats below.
- There are 171 million individuals covered by Social Security
- To qualify for benefits, you must “earn” 40 work credits in your lifetime, with the ability to collect up to 4 credits annually (valued at $1,300 per credit)
- 71% of recipients are retired workers (in 2017)
- SS payouts accumulate 8% from ages 62 to 70, so if you’re close to retirement, a great way to boost your payout is to wait to enroll
- The remaining 29% of benefits will go to the disabled and survivors
- In 2017, approximately 16% of benefits will be received by disabled workers and the remaining 13% goes to survivors of deceased beneficiaries
- In 2017, 62 million Americans will receive $955 billion in benefits
- Funding is acquired from 3 sources: interest on the program’s asset reserves, a 12.4% payroll tax on all earned income and the taxation of the benefits themselves
- 61% of seniors rely on their SS benefits for at least half their monthly income
- 48% of married seniors and 71% of unmarried retirees depend on Social Security for at least half their income
- Of unmarried seniors, 43% rely on benefits for about 90% of their income
- Close to half of single seniors look to Social Security to provide the majority of their income each month
- Most 65 year olds will live approximately 20 more years
- In 1960, the average life expectancy was 70, but it has since increased to 79, which means it is wise to factor in a longer lifespan since the program is only intended to account for 40% of wages in retirement
- By 2035, the senior population is set to grow by 65%
- Currently, those 65 and up number 48 million people, but the impending retirement of many baby boomers means that number could grow to 79 million over the next 18 years
- By 2035, the worker-to-recipient ratio will decline by 21%
- Presently, the worker-to-beneficiary ratio is 2.8-to-1, but experts estimate that ratio could drop to 2.2-to-1 in the next 18 years
- In the event of a long-term disability, about 90% of workers have protection
- While 67% of the private workplace does not offer long-term disability insurance, Social Security covers approximately 90% of workers ages 21 to 64 in the event of a work ending disability
- Of workers ages 20 to 49, about 96% do have protective insurance for survivors
- Since one in eight 20 year olds won’t live to see age 67, at least the majority of those who work in covered employment have survivors protection insurance for surviving spouses and children
- One third of workers report having nothing set aside for retirement
- With a potential 23% cut in benefits in 2034, the fact that 31% of the current working population has no money set aside, leaving them fully reliant on Social Security, is less than promising
In conclusion, although Social Security will be around for the long run, and likely covers more income than many believe, it would be wise to find secondary funding for retirement since Social Security was never intended to serve as your principal source.
