Now that the presidential election is nearly over, I hope that folks will start to focus a little bit more attention on their financial planning to-do lists as we close out 2020. I know it’s tempting to get caught up in speculating what Congress and the Federal Reserve will or won’t do with regards to the economy, the markets, and health care. But those are unknown variables right now that none of us can control.
And I also know that there are three significant changes to Social Security coming in 2021. I highly recommend that you discuss these issues with your fiduciary advisor before the end of the year so that you can start planning now.
1. Diet COLA.
The annual Social Security cost-of-living adjustment (COLA) helps benefits keep pace with increases in living expenses. In October, the Social Security Administration announced that the 2021 cost-of-living adjustment (COLA) would be 1.3%, which, on average, comes out to an extra $20 per month for single seniors and $33 per month for couples. That’s 0.3% less than the 2020 increase, and you can probably guess why.
Yup, Covid-19 has flattened the government’s COLA projections. Experts predict that even if we do get a vaccine by the end of the year, we’re still going to be dealing with lockdowns and social distancing requirements well into 2021. Those precautions go double for seniors who are far more vulnerable to the disease than their kids and grandkids. I suppose they are thinking the less we’re moving around, the less we’re spending on gasoline, air travel, restaurants, entertainment, and other typical living expenses.
2. Earn more if you keep working.
Starting with the SECURE Act of 2019, our government has been adjusting to a generation of healthier, more active seniors who are working longer, including during retirement. In 2021, Social Security will give a bit of a boost to working seniors who choose to take their benefits early. Beneficiaries who are age 65 or younger will be able to earn up to $18,960 before one benefit dollar is withheld for every $2 earned above the limit.
Now, earning $19,000 over the course of a year might not sound like much if you’re planning to take a part-time job in retirement just to keep busy a couple days per week. But what if you really like your new position and decide you want to add a few extra shifts? Or, what if you decide to start your own small business? Some working retirees might be better off delaying Social Security and letting that benefit grow rather than having those benefits withheld due to their retirement income.
Folks who haven’t yet retired should also be aware that in 2021 the maximum amount of earned income that’s subject to the 6.2% Social Security tax is going up by $5,100 to $142,800. You might want to make sure your working kids and grandkids discuss this change with their fiduciary advisor.
3. Full benefits come later.
Way back in 1983, Congress decided that one way to keep Social Security solvent was to gradually increase the age at which seniors qualified for full retirement benefits. Even then, experts were anticipating the trends in senior health and longevity that are bearing out today.
For everyone born between 1955 and 1959, the full retirement age increases by 2 months. That means anyone who is turning 62 in 2021 will have to wait until they are 66 years and 10 months old to claim full retirement. By 2027, seniors born after 1960 will have to wait until age 67 to take full retirement.
When should you take your benefits?
Remember, taking Social Security at your full retirement age guarantees you 100% of your benefit, as determined by the Social Security Administration’s primary insurance amount calculations. But if you delay taking Social Security until age 70, the size of your benefit will continue to grow.
That’s why, generally, we recommend that seniors who don’t need Social Security to pay their monthly bills wait until they turn 70 to start receiving their benefits. But these kinds of decisions are about more than just numbers. They’re about your individual health and life expectancies, how you and your spouse want to spend your retirement years and how you’re going to cover your basic needs.
If you have any questions or concerns, call up my team at Keen Wealth and schedule a year-end review. We can discuss these changes to Social Security and other important decisions that will keep you in the driver’s seat as we head into 2021.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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