The news has been aflutter recently with speculations that the annual cost of living adjustment (or COLA) for next year’s Social Security benefit could top 10%. For the average beneficiary, that would translate to about a $175 monthly benefit increase, from around $1670 to about $1,845, according to The Senior Citizens League.
The driving force behind a double-digit COLA is none other than runaway inflation—the change in the prices of goods and services—which registered 9.1% in June 2022, a 40-year high.
Whether or not a huge Social Security COLA comes to fruition, many workers who are approaching retirement may be grappling with a classic conundrum: should I live off my investments and delay claiming Social Security benefits, or should I start taking Social Security benefits sooner?
There are arguments for both scenarios. But a recent article in MarketWatch presented a convincing case for delaying those Social Security benefits for as long as possible.
Social Security is intended to act as an insurance against outliving your savings. Yet, many people view it instead as a type of investment. No matter how much you’ve saved for retirement over the course of your career, those savings are finite. Once they’re gone, they’re gone. And, if your savings are in a traditional 401(k) or IRA, you’ll pay income taxes on 100% of every dollar you spend.
On the other hand, Social Security benefits will continue to be paid, month after month, until you die. And benefit payments will continue to your spouse even after that. From a tax perspective, only 85 percent of each Social Security benefit payment is taxed.
And while investing offers some growth potential for your savings (depending on what you invest in), in most cases it isn’t guaranteed—and you could even take losses in some years (again, depending on your investments). Conversely, Social Security benefits generally incorporate a COLA increase each year—some years higher than others.
Finally, the longer you delay taking Social Security benefits, the higher your eventual monthly benefit amount will be. This not only benefits you, it benefits your spouse if you’re married and predecease them.
Everyone’s situation is different, of course, which is why it’s a great idea to discuss your options with a financial advisor. Ready to talk? Click here to set up your free, no-obligation appointment.