First Person: How Social Security Affects My Retirement

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Whether you're in your 20s or in your 60s, the subject of Social Security can be a tough one to tackle. For those in their 40s, 50s, and 60s, the questions might revolve more around when to take benefits. For those of us in our 20s and 30s, our questions might revolve more around whether there will still be benefits to take.

No matter what the age though, one common question will likely be regarding how best to maximize the benefits we do get. Therefore, when tackling the subject of Social Security, there are some common aspects that may need to be considered no matter what the age.

How much will benefits be?

There is a pretty simple way to figure out what my estimated benefits are. By signing up for a Social Security Statement online at the Social Security Administration website, I can get a better handle on my Social Security situation. Here I can review previous years' earnings, see the Social Security and Medicare taxes I've paid, see what my estimated benefits are, and review what current benefits would be should I become disabled. But there is more to tackling the subject of Social Security than just taking a look at estimated earnings and leaving it at that.

Considering cost of living adjustments

Cost of living adjustments (or COLAs) -- like annual raises at a job -- might not seem like much on their own. A measly one, two, or maybe even three percent increase might sound pretty pathetic at first, but it can add up over time. For example, a $1,000 monthly benefit payout, with a two percent annual increase will grow to nearly $1,500 after 20 years. While I'll admit that two percent isn't much, and likely only to keep up with inflation, it's something to consider nonetheless. However, these increases aren't a guarantee since COLAs are currently based upon the ever-fluctuating CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) and might eventually move to the Chained Consumer Price Index. For this reason, I tend to consider these adjustments in my Social Security planning, but don't count upon them.

The 75 percent rule

In their 2012 press release, the Social Security Board of Trustees notes the year 2033 as the projected point at which the trust funds for old-age, survivors and disability insurance will be exhausted. The release states that "At that time, there will be sufficient non-interest income coming in to pay about 75 percent of scheduled benefits."

For those of us who plan on a retirement after this point, this is an important aspect of Social Security's future to consider. For this reason, I adjust my current estimated benefits so that they are at 75 percent of their projected values.

Understanding payout levels

It's important to understand how benefit payout levels can be affected depending upon when they are taken. While it can be valuable to realize the difference in payment amount depending upon whether payments begin earlier or later in life, it's also important to understand the total amounts that these payments equate to over time. I provided an example of this in my article, "Ignore the 'Wait until you're 70' Social Security Advice" in which we can see how, while payment amounts may vary depending upon age, over a set timeframe, the amounts paid out may be very much similar. Having a good understanding of not only monthly payments, but amounts paid out over shorter or longer payment timeframes (for example age 65 to age 80, versus age 70 to age 80) can also play a critical part in better understanding Social Security.

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The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Calculations have not been verified by a professional. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.


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