If you’re already drawing Social Security, cost-of-living adjustments for 2023 are expected to be some of the largest retirees have seen in several years. That annual boost in benefits is in response to the highest inflation the country has experienced in 40 years. Current estimates put the cost-of-living adjustment for 2023 at 9.6 percent, which would translate into approximately $160.41 increase to the average monthly benefit payment of $1,670.95 for retired workers as of July 2022.
If you haven’t started taking Social Security yet, it’s something else you may want to consider as you decide when to claim. While you can start taking Social Security when you’re as young as 62, your benefit increases each year you wait (up to age 70). As inflation adjustments are made, they will have an outsized impact over time on those who get larger monthly checks.
For the sake of discussion, let’s say your full retirement age (FRA, or the point as which you get your full benefit) is age 67, and your full benefit is $1,500 per month. (You can use this Social Security Administration calculator to find your individual FRA). If you claim Social Security at 62, you will receive 30 percent less in benefits, or a payment of $1,050 per month. But if you wait until you turn 70, your benefit will increase by a total of 24 percent to $1,860. While the higher monthly benefit is nice, you are forgoing prior years of getting a benefit. Given that, one of the best ways to compare your options is to look at the cumulative benefit that you receive over time.
When you look at your cumulative benefit with different levels of adjustments for inflation, the impact these adjustments can have on waiting becomes clear:
With no inflation, in this scenario, individuals who wait until age 67 to claim will break even with the total amount they get in the year they’re 77 and will be ahead from there on out. Wait until ago 70, and you break even with claiming at 62 when you’re 79. But with 3 percent inflation, those break-even ages move up to 76 and 77, respectively. And the increases continue to magnify for the person who waits — who will see larger and larger increases each year over the person who claims at 62.
If you choose to file early
The decision of when to file for Social Security isn’t solely financial and varies for everyone. Whether it be health issues or a late-career job loss, you may find yourself needing to retire before turning 65. Or perhaps you want to travel when you’re relatively young and healthy and expect your financial needs to be more modest in your later retirement years. In those situations, you should work with your financial advisor to explore the best available path forward.
For example, married couples have a few advantages when it comes to claiming Social Security benefits. That's because you and your spouse can claim benefits individually at different times.
If you’ve been married at least a year and file at full retirement age, you will get either your benefit (based on your work record) or 50 percent of your spouse’s full benefit, whichever is higher. Note those who file prior to their full retirement age will receive less than 50 percent of spousal benefits. With this is mind, couples should think strategically about who begins collecting and when.
Ideally, the spouse who earned less a career would file to receive his or her benefit first. That brings some money into the household. Then the higher-earning spouse lets his or her benefit grow and files at the age of 70. If that spouse dies before the other, the surviving spouse will then get the larger benefit for life.
If you were formerly married but currently are single, you can also claim benefits based on your ex-spouse’s work history. So long as you were married 10 years or longer and your ex-spouse is eligible to begin collecting, you are entitled to one-half of your ex’s benefit.
Other options may include tapping savings and investment accounts; drawing from tax-advantaged retirement accounts, such as a 401(k), 403(b) or IRA; or incorporating a guaranteed income annuity in your retirement plan. But before pursuing any of these options, you should work with your advisor to get a complete picture, including potential tax implications.
If you have a well-rounded retirement plan, you should feel confident that Social Security is just one of many threads that make up your retirement safety net. If you don’t have a plan, or if you’re concerned that you may be faced with the need to tap into Social Security early, this is a good opportunity to reach out to a Northwestern Mutual financial advisor to review your options for the best way to maximize your benefits.