Every October, the Social Security Administration releases information regarding Cost-of-Living Adjustments to benefits. This year is no exception. On October 10th, the SSA will be releasing official details regarding the Cost-of-Living Adjustment that applies to 2020 Social Security payouts.
Expect an Social Security Benefits Boost of 1.6%
According to The Senior Citizen League, a nonpartisan group focused on senior issues, Social Security recipients will likely receive a 1.6% boost to their payouts, starting in 2020.
The league tracks data relating to how the SSA calculates its Cost-of-Living Adjustments. It bases their estimate on quarterly movements in the consumer price index for urban wage earners and clerical workers (CPI-W).
Mary Johnson, TSCL's Social Security policy analyst, mentions that this increase will be smaller than prior raises. She said that it “would raise an average retiree benefit by about $23.40 per month, a big drop from the $40.90 that people with that level of benefits received this year."
Effects of the COLA on Social Security Benefits
How the Cost-Of-Living Adjustment will affect you will depend on what type of beneficiary you are. Retirees will receive benefits from Social Security that are based on their earnings records over their careers. Meanwhile, an aged widow, or a surviving spouse who is at least age 60, might collect survivor benefits based on their spouse's record.
More details of what the adjustment will look like for different types of beneficiaries will be available from the SSA in October.
Smallest Cost-of-Living Adjustment in Three Years
While this adjustment is a welcome increase to Social Security payouts, it’s also the smallest benefits boost in three years.
Social Security beneficiaries received a 2.0% Cost-of-Living Adjustment in 2018 and a 2.8% Cost-of-Living Adjustment in 2019. However, the substantial increase last year was due to a variety of factors. Rising costs of energy products and an increasing cost of housing were two of the major factors behind the bigger-than-usual boost.
That being said, Social Security COLAs have averaged 1.4% over the past decade. Comparably, Social Security beneficiaries received a 3% average of COLAs in the decade prior. So while this increase is the lowest in the past three years, it’s still above average for the current decade.
Trade-offs for Lower Inflation
This smaller increase is partially due to lower inflation rates compared to the last two years.
Lower overall inflation means the costs of goods and services aren't rising as rapidly. That can be a good thing from the standpoint of those living on fixed monthly incomes.
Investors benefit from this inflation-combating feature in Social Security payments, but they need to consider how inflation will affect their money's purchasing power in other parts of their income plan.
Even low inflation rates can drastically impact healthcare and the cost of living. So, it’s essential to consider how inflation might affect your retirement planning.
Inflation is an important issue because Social Security serves as a foundation of dependable guaranteed income in retirement. Unlike income streams from portfolio assets in general, Social Security payouts are fixed and inflation-adjusting.
Therefore, they can't waver in what they pay, as other income streams might. If you want other choices that can offer you predictable monthly payments, an annuity can complement the payouts you receive from your Social Security.
Medicare Premiums Are Affected, Too
Beyond the overall increase in inflation, the rising cost of retirement healthcare is one of the biggest drivers behind cost of living increases.
For 2020, Medicare Trustees have forecast that Part B premiums will increase from $135.50 to $144.30 per month. Or in other words, Medicare participants will be looking at $8.80 per month more for premium payments.
For the first time in 10 years, income brackets that are used to determine surcharges for high-income retirees will see a big change.
They will be indexed to inflation starting Jan. 1, 2020. However, this excludes the newest top tier that was added this year. This tier will apply to individuals with incomes of $500,000 or more in 2017 and married couples whose joint income topped $750,000 in 2017.
All of this to say that higher-income retired households could end up paying more for the same coverage. These recipients will pay premiums that range from $189.60 to $460.50 per month per person, depending on income.
This can be a more substantial premium compared to the standard Medicare Part B premiums of $135.50 per month.
Change in Full Retirement Age
One of the biggest changes for 2020 is the Full Retirement Age jumping up to 67.
For years, Full Retirement Age was pegged to 66 years and some-months. But this change will increase the age at which people qualify for their full benefit from Social Security.
While an increase of a few months might seem insignificant, that jump could affect your Social Security payouts and strategy if you aren’t prepared.
Claim Social Security Efficiently
It's important to have a Social Security benefits claiming strategy that is best for your financial situation. An inefficient plan can cost you tens or hundreds of thousands of dollars in lost lifetime income.
You’re eligible to start claiming Social Security Benefits at age 62, but that strategy isn't right for everyone. In fact, one study found that ill-timed social security strategies are costing Americans an average of $67,000 in lost income per household.
And since people are living longer and spending more (not to mention the effects of inflation), retirees need to know how their benefits really work.
As you create or adjust your retirement income plan, personal guidance can help you get the most of your retirement money. Research has shown that retirement savers who work with financial professionals have reported higher savings, increased financial wellness, and a higher sense of overall well-being.
If you are ready, financial professionals at Jennifer Lang Financial Services can assist you. Connect with someone directly.