Social Security 101 in 2021
It has been a full decade since 2011, the year that the first Baby Boomers turned 65. Since then, this populous generation has been passing that milestone in droves and many more people are drawing near. Roughly 10,000 people in America will turn 65 every day until 2029.
This mass influx in Americans nearing retirement age has created a stronger than ever demand among consumers for help in understanding their Social Security filing options and guidance on how to maximize their benefits. We’re sure it’s not surprising to hear, but Social Security rules are anything but simple. Ultimately, they require individual analysis based on a handful of factors and assumptions to truly identify the“best” way to collect benefits in each situation.
What to Consider Before Claiming Your Social Security Benefits
Your 35 Highest-Earning Years
The Social Security Administration calculates your individual benefits based on your historical lifetime earnings (indexed for inflation), taking your highest 35 years of earnings (not necessarily consecutive years) and running it through an average monthly earnings formula to establish the benefit at your Full Retirement Age (FRA). It’s important to note that if you either entered the workforce late or had gaps in employment throughout your career, the Social Security Administration will place“zeros” into the formula if you do not have 35 years of earnings reported. This can affect your monthly benefit, and you might consider working a few more years to replace any zeros on your balance sheet before claiming benefits in order to receive a higher amount.
Retirement and the Benefits of Waiting
Many people believe that filing for your Social Security benefits needs to coincide directly with your retirement date. We are here to tell you that these two life events should be planned for and looked at separately (especially for those looking to retire before reaching their Social Security-defined FRA).
It’s commonly understood that filing for benefits before your FRA can result in a permanently reduced benefit. However, most people don’t understand that waiting to claim benefits past your FRA has additional benefits. In fact, your Social Security benefits increase by 8 percent every year you delay your benefit past your FRA until you reach 70 years old. These “delayed retirement credits” can significantly increase not only your monthly benefit but also your cumulative lifetime benefit the longer that you live.
Cost of Living Increase
The Social Security Administration recently announced that Social Security recipients will receive a 1.3 percent cost-of-living adjustment (COLA) for 2021, increasing monthly benefits by 1.3 percent to account for inflation. In 2020, the COLA was 1.6 percent, while in 2019, the COLA was 2.8 percent. As you estimate your future financial needs, know that your Social Security benefits are directly tied to the Consumer Price Index, and if that index increases by more than 0.1 percent year over year, your SocialSecurity benefits will increase by that exact same amount the following year.
Deciding when to file for benefits is a complex process with many factors to consider. It’s important to understand that your benefit and strategy might look different than your neighbor, sibling or best friend. We strongly believe that you need to look at your entire financial picture to see how Social Security fits best from a timing perspective.
Attend an Event to Learn More
This fall, we will once again be hosting four Savvy Social Security educational events in partnership with AAA Minneapolis to help AAA members understand their options when it comes to different filing strategies, divorcee and spousal benefits, taxation, and some unique, outside-the-box financial planning techniques that you can act on today. We look forward to seeing you this fall!
Steven C. Finkelstein, CFP®, Megan E. Gehrman, CFP® and Luke J. Strom, CFP® are financial advisors at Sterling Retirement Resources, Inc., 120 Broadway Ave S., Suite 200, Wayzata, MN 55391. (763) 762-3400.Securities and advisory services offered through Cetera Advisor Networks LLC, Member FINRA/SIPC, a Broker-Dealer & Registered Investment Advisor. Some advisory services also offered through AdvisorNetWealth Management. Cetera is under separate ownership from any other named entity.
