Need a nudge, or kick in the pants – Changes to Social Security

Johnny Depp movies romanticize life on the high seas and naval warfare of the 18th century. But war is hell and dangerous duties abound on the square-rigged frigates. One of the jobs was to quickly and efficiently supply the canon gun crews with gun powder. Mere boys, some as young as eight, were “recruited” for their size and agility to make the trip from the ship’s magazine, upstairs to the main deck, and back, as the carnage of another broadside battle continued. Those lads carried the ridiculous title of “powder monkeys,” had one of the most dangerous jobs on board, and many didn’t see their homes again.

I hope your life expectancy is longer than that of a powder monkey. Three decades of retirement deserve careful planning. Here are three planning insights about recent changes in Social Security retirement benefits.

Yay, a 1.7% raise!

Retirees can expect a bump in their monthly SS retirement checks starting in January. The average retired worker will see a $22 cost of living adjustment (COLA) to $1,328, and $36 for the average retired couple to $2,176. The maximum SS for a retiree reaching full retirement (age 66) in 2015 will be $2,663. The “taxable earnings” – workers and employers will each continue to contribute 6.2% of every paycheck – tops out at $118,500. Medicare B premiums remain unchanged ($105 per month). High income seniors will continue to be charged an additional Medicare Part B premium (based on income) and tops out about $231 a month – plus they may be subject to the 0.9% Medicare surcharge tax (under Obamacare) on excess earnings.

Since 1975, the COLA has been linked to the Consumer Price Index for Urban Wage Earners (CPI-W). It is set each October based on the prior 12 months’ data. Some advocates argue the CPI-W understates the rising costs seniors face. Others suggest the COLA should be linked to a lower measure of inflation – “chained CPI.” Nevertheless, the COLA adjustments have averaged about 3.8% annually since 1975 (a high of 14.3% in 1980, and zeros in 2010 and 2011). And they’ve averaged 1.7% for the past five years.

Planning Implications

Fill the gap – Even if you earn the maximum SS retirement benefit, it may only account for half of a $5,000 per month retirement lifestyle – and a lot less if future SS benefits get reduced or “full retirement age” is extended to preserve the sustainability of an entitlement program threatened to go bust. You may have a gap to fill, either by necessity or planning conservatively.

• Current investments (after tax-savings, retirement accounts – IRA, 401k, Thrift Savings, Deferred Comp, etc. – rental real estate, etc.)

• Future savings, business sales proceeds, and windfalls (inheritances, insurance benefits, lottery, etc.)

Protect from the secret menace, inflation – What can you do to put things better in your favor so that the total of all your retirement paychecks (SS, pensions, annuities, account distributions, etc.) keep pace with rising living costs and you don’t run out of money? Inflation is like another tax. Say your retirement income rises 3% annually, but inflation averages 4%… your income will be worth 83% of what it is today in twenty years. And God forbid you’ve locked yourself into a fixed payout – $100 a month, and every month until you leave this Earth. That $100 bill will be worth about half as much as it is today in twenty years if inflation taxes you at 3% a year.

• Heed one of the “Five Rules of Gold” in the George S. Clason classic, The Richest Man in Babylon, which was “don’t kill your slaves.” Don’t spend all your investment returns… reinvest some for the future to multiply (compound).

• Have some “growth” in your portfolios… don’t invest solely for “income” (which is close as a gnat’s bottom to the ground these days, unless you “reach” for riskier investments).

• Downsize your debt, living costs (including taxes), and your house (and your knees might appreciate fewer stairs).

Double check those Social Security Statements – Miss those green statements containing estimated benefit forecasts? They’re back! SSA bowed to public pressure after they stopped mailing them in 2011 in a cost-cutting move. Workers were advised to set up online accounts at, but apparently only 14 million logged on. Watch your mailbox for statements in those milestone years (age 25, 30, 35… to age 60), and register online.

• Check your benefit estimates, descriptions of the Windfall Elimination Provision and Government Offset rules that can reduce benefits for the so-called “double dippers,” and your earnings history.

I read an interesting survey by American Century that asked workers participating in their company’s retirement plan “what intervention, if any, do they want from their employers?” Forty percent wanted “a slight nudge” to encourage them to save for retirement. Another two in five wanted something a bit stronger – “a strong nudge” or a “kick in the pants.” So I suggest “Please sir, may I have another?” and chat with your advisors. Good luck.

About Brian Loy

Brian Loy writes insightful and inspiring articles about the ever-changing world of personal finance and the global trends that affect the risk and return on investments and shape the financial- and retirement-planning process.
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