In the US, income for retirement has mostly been based on three pillars, specifically referring to income derived from savings or assets, Social Security benefits, and employer-provided pensions, which are inclusive of retirement accounts.
Annual adjustments are made according to the cost-of-living adjustments as well as inflation. For most Americans, Social Security forms, the basis of their retirement. For others, it may be their only source of income.
The value of Social Security benefits
As mentioned above, Social Security benefits are adjusted somewhat to the cost-of-living (COLA) as well as to inflation. Back in the day, COLA adjustments on Social Security only occurred when inflation exceeded or was at the level of 3%. Luckily, since 1986, this has been amended, although it still does not automatically come into play. This rings true when there is a negative or nominal CPI-W increase.
Other arguments state that not all of the expenses covered by retired people are reflected in the inflation data collected.
In simple terms, if these expenses increase more than the annual retirement adjustments, it will leave the individuals with less buying power and in a financial predicament. But the bottom line persists: the Social Security Administration does aim to ensure that the benefits provide some measure of relief.
Red Flag situations in the Social Security
Social Security benefits are sometimes a difficult terrain to navigate, and messing things up can happen quickly. Loads of information have become available on how to utilize these benefits for maximum gain, but there are also some pitfalls to be wary of. It is advisable to stay knowledgeable to ensure that a decision made in the short term won’t affect you or your related beneficiaries in the long run.
Failing to estimate benefits due before going on retirement
This is a critical mistake. It is wise to factor in information about how much your retirement benefit would be, especially noting these on early retirement, at full retirement age, and then waiting until 70 to draw benefits. Combining this with a detailed retirement budget will help to give a clear picture.
Knowing what expenses one would consider, as well as factoring in inflation, gives more detailed answers.
This will help to set aside money for long-term health care costs, day-to-day living expenses, etc. Retirement tools come in handy to help with these calculations. Based on the Social Security benefits suspension policy, one would also be able to identify when and if suspending retirement benefits would be advantageous. Favoring this option, if circumstances permit, may allow benefits to grow even more.
Getting your FRA wrong and claiming too early
Another pitfall is miscalculating your full retirement age (FRA). This refers to the age at which you are eligible to receive 100% of your retirement benefits. If, for example, you were born in 1955, your FRA would be 66 years and 2 months. Claiming earlier than your FRA, say at 62, will provide you with fewer benefits. You would essentially look at 25.83% less in benefits for yourself and 30.83% less in spousal benefits.
Putting in the time and effort to do proper homework
Retirement is a major life decision that requires adequate planning and proper research. This is not something that can be taken lightly, as the consequences of decisions made at one time can affect the outcome at a later point in life. Spousal benefits also force one to ensure that adequate preparations are in place for other affected individuals.
The Social Security Administration places a lot of emphasis on proper information dissemination. A lot of tools are available online that can help calculate retirement benefits. If possible, a financial advisor can also be contacted for guidance.
