As you approach retirement, it’s essential for Iowans to understand the Social Security changes that may impact your benefits.
Social Security is a critical source of income for many retirees, and making informed decisions about when to start collecting benefits can affect your retirement income. In this blog, we will discuss some essential Social Security changes to be aware of.
Understanding Full Retirement Age
Your full retirement age (FRA) is when you can receive your full Social Security retirement benefit. The FRA is 66 for those born between 1943 and 1954. For those born between 1955 and 1959, the FRA gradually increases yearly by two months. For those born in 1960 or later, the FRA is 67.
If you choose to collect Social Security before your FRA, your monthly benefit amount will be permanently reduced. The reduction amount is based on how early you decide to collect benefits.
- For example, if your FRA is 66 and you begin collecting benefits at 62, your monthly benefit will be reduced by up to 30 percent.
Understanding your FRA and the impact of taking benefits early or delaying them can help you make informed decisions about your retirement finances. It’s important to note that your FRA may also impact your spouse’s benefit amount if they are entitled to spousal benefits based on your work record. Let’s look at some of the changes affecting Social Security for retirees.
Cost of Living Adjustments (COLA) Is Increasing
Social Security benefits are adjusted annually to keep up with inflation, using the Consumer Price Index (CPI). In recent years, the adjustments have been minor, leading to concerns about the adequacy of benefits for retirees. However, the Social Security Administration (SSA) has announced a substantial increase of 8.7% for benefit checks in 2023. This is even higher than the 5.9% increase in 2022, the highest adjustment since 1981.
Here is the level of adjustments that recipients have enjoyed over the five years.
Source: Social Security Administration
The 8.7% increase resulted in an average monthly benefits increase of $146 for retired workers on Social Security. The average monthly check for retired workers rose from $1,681 to $1,827. For couples with both partners receiving benefits, the estimated payment has increased from $2,734 to $2,972, a $238 rise.
To determine the cost of living adjustments, the SSA compared the Consumer Price Index Wage (CPI-W) for the prior year’s third quarter to the current year’s. The COLA is then adjusted based on the difference in CPI-W from one year to the next.
Maximum Taxable Earnings Increased
The maximum earnings subject to Social Security taxes typically increase yearly to keep pace with inflation and changes in average wages. In 2022, workers were taxed on profits up to $147,000 at a rate of 6.2 percent. However, for 2023, the maximum earnings subject to Social Security taxes increased to $160,200. (SSA.gov)
Social Security taxes withheld from a worker’s paycheck increase if their earnings exceed the new maximum threshold. This adjustment was due to an increase in average wages in the U.S. As a result, more of a worker’s income is subject to the Social Security tax, which may impact their take-home pay. It’s important to note that the tax rate remains at 6.2%. This change underscores the importance of staying informed about Social Security updates to help ensure you can make informed financial decisions.
Maximum Social Security Benefits Rose
As anticipated, the maximum Social Security benefit for a worker who retires at full retirement age increased. Notably, this maximum benefit applies to individuals who retire at the full retirement age, which is 67 for anyone born after 1960. Depending on your income, you may be required to pay taxes on your Social Security benefits.
Here’s a look at the initial monthly benefit for 2023 by retirement age:
- At age 62: $2,572
- At age 65: $3,279
- At age 66: $3,506
- At age 70: $4,555
The calculation is based on your combined income, which includes adjusted gross income, nontaxable interest, and half of your Social Security benefits. If your combined income exceeds certain thresholds, up to 85% of your Social Security benefits may be subject to income tax. Considering these factors, preparing for tax liabilities is essential when planning for retirement. A trusted financial advisor can help ensure you’re on track.
Benefits for Spouses and Disabled Workers Went Up
The Social Security Administration (SSA) announced increased benefits for spouses and disabled workers for 2023. The average widowed mother with two children saw a substantial increase in benefits, from $3,238 to $3,520. Similarly, aged widows and widowers living alone received a boost from $1,567 to $1,704. Disabled workers with a spouse and one or more children also experienced increased benefits, rising from $2,407 to $2,616.
It’s essential to remember that the benefit increases mentioned are averages, and individual circumstances may vary. Nevertheless, these adjustments will offer vital financial support for those who rely on Social Security benefits. If you’re uncertain about how to claim your benefits, a financial advisor can provide guidance and help you make informed decisions.
Don’t Rely on Social Security Alone
Remember, Social Security payments were only meant to subsidize approximately 40% of your pre-retirement income, so Social Security alone isn’t enough to fund your lifestyle after leaving the workforce.
Secondly, the Social Security Administration has been operating with a surplus for the last few decades, meaning its extra funds went into a trust to supplement money workers put into the system themselves. However, the surplus is set to run out in 2034.
As long as there are workers contributing to Social Security, there will be money to pay Social Security benefits, so you shouldn’t worry about the program running out of funds entirely. But once the surplus funding disappears, payments are likely to decrease or the government may make other changes to the program. This is why it is advised to have multiple sources of income to help create a robust and diverse portfolio.
Working With a Financial Advisor
Keeping up to date with Social Security changes is crucial in maximizing your benefits to support your retirement goals. By taking this step, you are moving closer to helping ensure that your assets will last throughout your lifetime.
At Johnson Wealth and Income Management, we understand that retirement planning is a journey, and we’re here to guide you every step of the way. If you need assistance with Social Security planning, investment management, or tax planning, we can help. Our team has the experience and knowledge to help you achieve your financial goals and enjoy a worry-free retirement.
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