This year marked a rather significant increase in benefits for those receiving Social Security. The 2018 cost of living adjustment (COLA) was one of the largest in the past decade, giving retirement beneficiaries an extra 2% on their checks (the most significant jump since 2012.)
Unfortunately, there are forces at work that can easily chip away at these additional funds - possibly even leaving retirees with less than last year. Here are the most common things to watch for, and how you can mitigate losses to keep more in your pocket.
1. Inflation Is Outpacing COLA
Even with a more substantial increase in checks this year, it’s not quite enough to help overcome the greater obstacles of consumer pricing. According to The Senior Citizens League, Social Security dollars that once paid for $100 worth of groceries in 2000, are now only able to buy about $70 of food and supplies. This number is staggering, and yet most retirees don’t realize because pricing increases happen incrementally, little by little, over a period of months and even years.
This is why it is even more important to keep an eye on those everyday purchases, making a note of what things should cost and being aware of what the register rings up. Up to 10% of stores have been guilty of overcharging at checkout. Older customers who have a hard time hearing or seeing may not notice these pricing errors until they get home, if at all. Some states, such as Michigan, even have laws in place to reward shoppers who have experienced an overcharge.
2. Taxation Is Growing
While inflation is growing steadily, the threshold for tax filers is not. A bigger number of retirees are likely to find that their Social Security earnings are subject to taxation, even as the new tax law passed last year goes into effect. As the new tax brackets are tied to the slow-growing Consumer Price Index (CPI), some tax brackets won’t raise thresholds fast enough to make up for the difference. Pair that with the fact that income thresholds were not raised aggressively enough to begin with, and you’ll likely see some of your benefits subject to taxation.
What can you do? Be diligent about tracking all of your income types and use the IRS tool to know if you need to pay taxes long before it’s time to file. Your CPA or tax attorney can often help you find out what tax-savings vehicles are available to help offset costs. If you find that you’re living comfortably and want to pass along more to your grandchildren, for example, this is a discussion well worth having.
3. You’ll Collect Less
You already know that waiting until full retirement age entitles you to larger payments, but you’ll also receive fewer payments over the course of your life. So, what happens when the government raises the full retirement age at a rate of two months per year? Each new group of retirees will receive a little bit less than their predecessors.
While people are living longer, and the argument can be made that this means more payouts overall, those who depend on Social Security benefits as their sole source of income in retirement are often the same people who can’t wait until full retirement age. In any case, smaller payouts - either in quantity or quality - are happening over time.
If possible, look at ways to work a bit into retirement, hold off on collecting until full retirement age, or look at alternative ways to save for your golden years. Social Security shouldn’t be your only source of income, but it often is. If you’re far enough away from retirement to have a choice in the matter, see about boosting your benefit checks through more profitable earnings years, as well.
4. Social Security Funding Could Change
If you’re a younger beneficiary, this is more significant to you. With the current funding for the Social Security program is not robust enough to keep it running past 2034, it's possible that some changes could be made to ensure stability. Will that mean raising the retirement age (again)? Are there going to be cuts? Is privatization back on the table?
Until more talks are made by the powers that be, it will be hard to plan for retirement years past that 2034 mark. Younger retirees will need to keep an eye on legislation and stay active in the discussion that will affect them most in their older age.
While we still have a few more months left before speculation can be made on 2019 increases, the story will remain the same. Taking care to protect your benefits is wise, no matter how large they are. People of all income types and brackets should be on alert to the market forces that have the most effect on how far your retirement money will go every year.
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