The year 2020 marks a historic precedent in terms of Social Security payments. For the first time since trust funds were established in 1983, Social Security payments will exceed more in this year than the funds accumulate. While this may not be of concern today experts predict payouts to be significantly lower by 2034 if Congress doesn’t make moves to rectify the situation. This article outlines what you should know so you can act now to ensure your retirement income is sufficient above and beyond Social Security benefits.
An article in Investment News reports that Social Security payouts are expected to be approximately 77 percent of FICA taxes by 2034. If part of your retirement plan is to depend on Social Security as a significant source of income in your golden years, it’s time to regroup with your financial advisor to develop an alternate strategy if you’ve not done so yet.
Social Security Changes for 2020
Cost of living adjustment is disappointing.
The cost of living adjustment (COLA) for 2020 is 1.6 percent—a full point lower than the 2.8 percent that was assigned for 2019. This is alarming, as costs for housing and health care have been steadily rising for years now. And, of course, Social Security is typically used by retirees to supplement payment for these costs of living.
However, any increased COLA also instigates additional taxes.
To add insult to injury, retirees must pay tax on income generated by their Social Security benefits if those payments cause their combined income to top $25,000 for individuals or $34,000 for married couples. So, even the paltry COLA increase may affect more retirees than in the past. Years ago, this only affected about 10 percent of retirees. But, according to Money and Markets, last year approximately half of retiree households paid taxes on at least a portion of their benefits from Social Security because these income thresholds haven’t been adjusted for inflation.
And, the full retirement age jumps from age 65 to 67.
If you were born in 1958, your new full retirement age is 66 years and 8 months. This means, you have to wait until you are that age to apply for and receive your full retirement benefits. You are able to claim reduced, early benefits beginning at age 62—but, doing so will cause your benefits to be permanently reduced, even after you reach full-retirement age. Additionally, from 2020 through 2022, full retirement age will gradually adjust to 67 years if you were born in 1960 and later.
File-and-suspend bonus is no more.
Once upon a time, retirees could file for their benefits, allowing eligible family members to file and receive payments they were entitled to receive. Then, the retiree suspended his or her own benefits, which facilitated a yearly 8 percent growth increase of their benefits until they turned 70. The termination of the file-and-suspend strategy was initiated in 2015, but final allowances come to an end when the last of those afforded this maneuver turn 70 in 2020.
Spousal benefits take a direct hit.
Another popular strategy that ended in 2015 is a spouse’s ability to claim half of their spouse’s (or ex-spouse if that marriage lasted 10+ years) full retirement age Social Security benefit amount—before taking their own. This allowed their own benefits to accrue delayed retirement credits until they reached their full retirement age of 70, when they could begin taking their own benefits in place of the spousal benefit. People born in 1953 and earlier can still use this tactic, but the rest of us are unable to file restricted claims for spousal benefits. Read our recent article on spousal Social Security benefits to learn more.
As you can see, there are many changes that may affect your retirement strategy regarding Social Security benefits. But this article is provided to you for general informational purposes only. We encourage you to consult with your financial professional to determine how these changes affect you and the steps you should take, if any, to alleviate any negative impact.