If you ever find yourself in a conversation with a financial planner and want to get them talking excitedly, just ask when you should start receiving your Social Security retirement benefits. This is a topic that excites us planners because decisions related to Social Security can have an enormous impact on a retirement plan's ultimate success. More often than not, I am encouraging clients to delay receiving their Social Security benefits. This advice is of course barring any health concerns or other unique factors that would negate this recommendation. Delaying is such a powerful strategy because every year that you delay after your Full Retirement Age (FRA), your benefits grow by a significant 8% per year. In a world where guaranteed sources of retirement income are hard to come by, Social Security truly stands alone.
Outside of the benefit growth rate, there are other reasons to delay. For example: if you are married and your spouse passes away, the surviving spouse keeps the higher monthly check. Additionally, and of recent noteworthiness, Cost of Living Adjustments (COLA) help keep your retirement benefits growing over time and indexed for inflation.
On October 13th the Social Security Administration announced that recipients will receive the largest COLA increase since 1982. Retiree benefits will rise by a whopping 5.9% in 2022. This increase is a reflection of rising prices in our economy. If prices continue to climb or stay elevated then it could be a wash for recipients. However, if prices normalize, as the Federal Reserve believes they will, then this adjustment could be a major windfall for retirees. Those who delayed receiving benefits longer will prosper more because COLAs are based on their current, higher benefit.
It is important to note that COLAs are based on your current benefit amount. So, if you delayed receiving benefits and have a higher monthly benefit, then as a result you'll receive a bigger "raise" in dollar terms when COLA adjustments take effect. Even more importantly, annual COLA adjustments compound on each other where each year's new adjustment starts on last year's new higher (COLA adjusted) benefit base.
Let's look at some numbers to illustrate. Here is an example of two friends retiring at the same time:
Fred retires this year and has reached his full retirement age (currently 66 and 2 months) and qualifies for the highest Social Security retirement benefit based on his lifetime earnings history. Fred elects to start taking income right away. His benefit would be $3,148 per month. His best friend Barney also qualifies for the highest possible Social Security benefit but he delayed receiving his benefits until age 70. As a result, Barney will receive a monthly check in the amount of $3,895. Annualized these amounts are $37,776 and $46,740 respectively and both figures ignore any elective tax withholdings.
Both Fred & Barney will see an increase in 2022 thanks to the COLA adjustment. Fred will see an increase of $186 in his monthly check ($2,229 annually), while Barney will see a monthly increase of $230 ($2,758 per year). The difference is $529 per year. Over a 30 year retirement Barney will receive an additional $15,870 due to just this one COLA adjustment alone. What's more, we must also consider the compounding effect. Barney will see his benefit increase to a total of $49,498 after the 2022 COLA adjustment. Assuming there will be a COLA adjustment the following year (2023), benefits will be based on this new, higher amount. This will continue every year in retirement as long as there is a COLA adjustment.
There are many reasons to strongly consider delaying Social Security retirement benefits for as long as possible. And as with many financial decisions, the path you chose should be based on your own unique circumstances and preferences. And if you wish to discuss this topic with me, please know that I will be very excited to do so.
Breakwater Financial, LLC is a registered investment advisor. The content of this blog post is for informational and educational purposes only and is not to be considered investment, legal or tax advice. If you have any questions regarding this blog post, please contact us.