by William Sabin - Retirement Strategy
We review the major changes to Social Security benefits and how you might be effected.
A discussion of why you might want to delay payments to you is included.
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Its that time of year when the Social Security Administration (SSA) announces its annual updates to Social Security. Below are the key changes that go into effect January 1, 2019 based SSAA's Fact Sheet.
Cost of Living Adjustment
Beneficiaries will see a 2.8% increase in payments due to a cost-of-living adjustment (COLA). This increase is meant to counteract the effect of inflation to ensure you have the same buying power as the year before. While it seems like a 2.8% increase is a lot, this really breaks down to just an increase of $39 per month for the average retiree.
In December 2018, Social Security COLA notices will be available online to most beneficiaries in the Message Center of their my Social Security. In the past, these notices were only mailed. This is a huge improvement in my opinion.
Maximum taxable earnings will increase to $132,900
In 2019, the maximum taxable income for social security taxes moves from $128,400 to $132,900. Any earnings above that amount are not subject to the tax. The 7.65% tax rate shown below is the combined rate for Social Security and Medicare. The Social Security portion (OASDI) is 6.20% on earnings. The Medicare portion (NYSE:HI) is 1.45% on all earnings.
While the earnings cap increases by 4% ($128,400 to $132, 900), the maximum social security monthly benefit for a worker retiring at full retirement age increases by only 3% ($2,788 vs $2,861).
Full retirement age continues to increase
As discussed in my latest article, the earliest you can start claiming Social Security retirement benefits is 62. If you claim Social Security benefits at 62, think through the decision carefully ensuring you understand how Social Security benefits work, so you can make the right choice for you and your family.
See the below chart on how the SSA defines ‘full retirement’.
To be fair, there is a breakeven that one should review on when to take benefits - the point at which the amount you receive if you claim later equals the amount you would have received if you had started early. Social Security is designed with "actuarial neutrality" built it. Meaning, regardless if you start receiving your benefits earlier or later, you should receive about the same total money over your lifetime. However, since delaying your benefits provides a larger monthly check, most experts advise to delay receiving a payment as long as possible.
Below is a chart showing the break even at a number of typical monthly social security income levels along with if you started to take a check at 62 vs 66 and 70. The break-evens ages are shown in the last column – if you take benefits early, it will generally take you to age 77 to 83 to breakeven – where the extra early payments equal the increased payments for waiting.
Its important to note that you are guaranteed these additional monthly benefits by waiting. While you potentially could get payments starting at 62 and invest in instruments yielding more than you would have by waiting to receive a bigger check later, there is no guarantee of this.
Earnings limits will increase
Many people work while collecting retirement benefits. If you are one of those that works, all or part of your benefits temporarily withheld depending on how much you earn. The main item that changes here is the income limits increase in 2019.
Per the table below, you will be able to earn up to $17,640 in 2019 before you have any reductions to your social security benefits. After that, $1 will be deducted from your payment for every $2 in income that exceeds the limit.
Again, per the table, if you reach full retirement (as defined) in 2019, you will be able to earn $46,920. In addition, for every $3 earned over the 2019 limit, your social security payment will be reduced by $1.
Social Security disability thresholds increase
Social Security disability payments will increase for 2019. For example, a legally blind person will receive an increase of $70 per month to a maximum of $2,040 a month.
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