Large Social Security Increase Projected for 2022
There is expected to be a 5-6% increase in Social Security benefits beginning in January 2022, which would be the largest benefit increase in years. The increase would be due to high inflation since last summer.
Social Security benefit increases are based on annual changes from September to September each year in the consumer-price index (CPI) and are announced annually in October. CPI data thus far has produced estimates in the 5% – 6.1% range, which would be the highest annual increase in Social Security benefits since 2008, per a policy analyst of The Senior Citizens League.**
The increases in 2021 and 2020 Social Security benefits were 1.3% and 1.6%, respectively. Over the last decade, cost of living (COLA) increases in Social Security averaged 1.4%. These were much lower than the 3% average increases in the preceding decade, between 2000-2009.
However, some of the benefit increase will likely be offset by higher Medicare health premiums next year. For those still working, the maximum wage base subject to Social Security and Medicare taxes will increase in 2022. These will be announced later in 2021.
Social Security is a vital benefit for most people, and we think this will continue for the long-term. For example, if a couple receives $20,000 per person, that is $40,000 per year. Using what was considered a historically safe withdrawal rate of 4% from a diversified stock and fixed income portfolio, the $40,000 per year income flow would be the equivalent of having $1,000,000 of assets.
If you are receiving more than $20,000 per year (the maximum individual benefit will be around $40,000 per year in 2022), or your future projection is to receive more than that, the equivalent asset base would be much greater than $1 million. This income stream should not be under-valued, especially as the benefits are risk-free and not subject to any financial market volatility. And since interest rates have been very low since around 2008, the value of the Social Security income stream may be even greater.
Even if you are many years from when you may begin to collect Social Security, this 2022 increase in benefits will be beneficial to you when you start to receive your benefits, due to future compounding. If there is no change in the future benefits calculation, someone who begins to collect Social Security 20 years from now will receive $1,600 – $2,000 more every year for the rest of their life, if instead of the projected 6% increase for 2022, it had been an increase of only 1.5% (assuming 2% subsequent annual increases in the future).
It is widely accepted that the true cost of living generally increases more than the COLA calculation of benefit increases from Social Security. This raises the importance of striving to maintain your purchasing power through having your assets grow over the long term at a rate that exceeds inflation. This is why we recommend having an appropriate long-term allocation to stocks (based on your specific circumstances), as the long term returns from stocks have far outpaced the rate of inflation.
While stocks are volatile, and will continue to be in the future, you should focus on the long-term benefits of stock ownership in a diversified portfolio. We plan so you can strive to have a solid “fixed income foundation” while you are in retirement, to provide stability for your near-term financial needs.
Though it can be difficult, patience and discipline are required to maintain your stock allocation, but it has been rewarding to do so over the long-term. Your focus should be on the long-term, not on the next few months or years, but on the rest of your life, and that of your spouse and other family members.
Social Security planning
If you are not yet receiving Social Security benefits, or are years from receiving Social Security benefits, you should verify your projections regularly at SSA.gov. Check your earnings and projected benefits every few years.
If you delay starting Social Security from your full retirement age (age 66-67, depending on your year of birth) until age 70, your benefits increase 8% per year, for each year you postpone beginning to receive Social Security benefits. This decision should be evaluated closely, based on your health, family life expectancy and your financial situation.
Benefits are based on a 35-year average of your earnings, which is weighted toward your later years of earnings. Also, it is important that you, and a spouse, earn credits for as many years as you can. For example, for 2021, you earn one credit for each $1,470 of earnings, up to 4 credits per year. You need to earn 40 credits, or 10 years of work, to be eligible for retirement benefits.***
Even if you or your spouse only work part-time for a significant number of years, there is still a long-term benefit of earning some amount of money, to earn these credits, and the resultant years of Social Security benefits later in life.
Social Security is a valuable benefit and should be considered in your long-term planning as a source of income that is not subject to financial market fluctuations.
Focus on the long-term. Adhere to your plan. Talk to us about your planning. Make good decisions.
As always, we are here for you, and family members or friends who could use our guidance and assistance. Talk to us.
***Data per Social Security website, SSA.gov.
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