Whether it’s filling your gas tank, picking up a few items at the grocery store or just turning on the nightly news, the impact of inflation seems to be everywhere these days. Fortunately for retirees, the Social Security Administration adjusts benefits annually through its annual Cost-of-Living Adjustment (COLA) to help preserve the spending power of benefits. The administration announced recently that benefits checks will go up 8.7 percent for 2023 — the largest increase in more than 40 years.
Here’s a look at how much retirees’ average monthly checks will go up in 2023 — and how the increase could affect your financial planning.
What changes you’ll see if you’ve already claimed Social Security
More than 70 million people receive monthly benefit checks from the Social Security Administration. Of those, nearly 63 million are Social Security recipients, and another 7.5 million receive Supplemental Security Income. Some receive both forms of payments.
On average, recipients received about $1,547 per month in benefits for 2022. For 2023, that figure is expected to grow by nearly $135 each month to $1,682. The increase amounts to $1,615 in additional benefits for 2023 compared to this year.
The maximum Social Security benefit for a worker retiring at full retirement age is increasing to $3,636 per month in 2023, up from $3,345 per month in 2022. If you already started receiving benefits but find that you can cover expenses by other means, you also have the option to suspend Social Security until age 70.
There’s also a change that affects those of us still in the workforce. When you’re in the workforce, you pay 6.2 percent in Social Security tax; your employer also kicks in about 6.2 percent. Self-employed workers pay the full 12.4 percent. However, the taxes apply to only to a certain amount of income. For 2023, the maximum amount of pay that’s subject to Social Security tax will increase by 8.9 percent to $160,300, up from $147,000 for 2022.
Things to consider when claiming your Social Security
While you can start claiming Social Security beginning at age 62, you must be at your full retirement age (FRA) (either age 66 or 67, depending on when you were born) in order to receive 100 percent of your benefit. Additionally, for every year that you delay receiving these funds after your FRA up to age 70, you’ll receive an 8 percent bump in your benefits, which will remain in place for the rest of your life.
Of course, when to file for Social Security isn’t solely a financial decision 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. On the flip side, maybe you love your work and don’t have any plan to retire. These are all important considerations when it comes to deciding when to claim your Social Security benefit.
Social Security is just one part of a larger financial plan
Social Security is typically a critical base of income for retirees because it’s guaranteed and unaffected by swings in the market. But for most people, it’s just one part of a larger plan that’s designed to help you create reliable income while protecting against many known risks, including inflation. The guaranteed, stable payments from Social Security tend to pair well with other financial tools like investments, which can help to grow your wealth over time — but can be volatile in the short term.
Additional tools, such as guaranteed income annuities, working alongside Social Security reduce volatility in a financial plan and can help protect you from running out of money in retirement should you live longer than you expect. Additionally, whole life insurance can help protect your financial plan against volatility while preserving your legacy. Your cash value is essentially another cash reserve (that’s likely to grow more than money sitting in a checking account) because you can access it during down markets. In addition, the death benefit will allow you to be more deliberate about your legacy.
While the decision of how to use each of the above options may seem daunting, a financial advisor can help you design a plan to get the most out of your assets during retirement. Just know that if you have a comprehensive retirement plan, you should feel confident that Social Security is just one of many threads that make up your retirement safety net.