Should Retirees Take Social Security Early With the Largest Benefit Increase in Decades Looming?
If you’ve been following Social Security news lately, then you’ve probably heard that retirees in the program are slated to receive one of the largest increases to their benefits in decades.
That’s because inflation has been sky high, and the Social Security program incorporates a cost-of-living adjustment (COLA) each year to ensure program participants don’t lose purchasing power when consumer prices jump.
Although it won’t be announced until next month, the COLA is projected to boost Social Security checks by approximately 8% to 10% in 2023. Given this significant increase, should retirees think about taking Social Security early to take advantage of the bump?
What happens when you take Social Security early?
Choosing to claim Social Security at 62 can lower your benefits by as much as 30% from your primary insurance amount (PIA) — the benefit you’re entitled to at your full retirement age (FRA). FRA is 67 for those born after 1960 or between 66 and 67 for those born between 1943 and 1959.
On the flip side, waiting until 70 will increase your benefits thanks to delayed retirement credits. Put simply, the earlier you take Social Security, the smaller your monthly benefit will be because the government expects to have to pay you for longer. Take benefits later, and the government expects to pay you for a shorter period of time so your checks increase.
So let’s say you turn 62 before the end of the year and decide to opt into Social Security as soon as possible. Let’s also say that at your FRA of 67, your PIA would have been $1,000. A 30% penalty for taking Social Security at 62 would reduce your benefits to just $700.
When you are thinking about whether to take Social Security early, the goal is to figure out how you can maximize those benefits based on your life expectancy. So if you are in reasonably good health and think you can wait it usually makes sense to do so because you’ll receive higher benefits down the line. But surging inflation has thrown another wrinkle into this argument: with the cost of everything from shelter to medical costs rising so dramatically, perhaps you do need assistance from Social Security to cover these expenses. Whether or not to claim Social Security early is definitely not an easy question to answer.
From a financial perspective, here is what the question looks like. If we go back to our example above and there is a 9% COLA increase in 2023 then your benefit would increase from about $700 to roughly $763. So, you could receive that $763 check plus any annual COLA adjustments for four or five years more than you would if you opt to retire at the FRA of 66 or 67. But if you waited until your FRA, you would receive your full $1,000 monthly benefit plus the annual COLA adjustments during the four- or five-year period you waited.
There are a few other things to consider. Benefits are going up because the cost of living is rising and the COLA adjustment may not even be enough to keep up with inflation, so while it’s an increase on paper it may not increase your real wealth at all.
Furthermore, part of the way your Social Security benefits are calculated is by looking at your earnings over the 35 years you made the most money. If you are 62 and just got a promotion to your highest position and salary ever, you will still be paying Social Security taxes on those earnings, which could help increase your benefits over time. After all, there has also been wage inflation over the last year.
The problem is if you are below the FRA higher earnings can actually result in a further deduction to your current monthly benefits. In 2022, if you are under the FRA, the annual earnings limit is $19,560. After you earn that amount, $1 from is subtracted from your benefits for every $2 of your earnings above that $19,560 annual limit. You can get credit later for those forfeited benefits, but not everyone ever gets all of that amount back.
Should you take Social Security early this year?
Despite the appeal of the upcoming COLA increase, the crux of the issue regarding taking Social Security early still depends a lot on your health and where you are at in life. If you end up waiting a year or two to take Social Security the higher COLA adjustment will still be factored in those payments. Ultimately, I wouldn’t base your decision on taking Social Security early on the upcoming COLA increase.
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