Making the most of Social Security

Maximizing your benefit can help you enjoy the retirement you've always envisioned

19 Dec 2018

Key takeaways

  • In 2019, the Social Security Cost of Living Adjustment (COLA) increases 2.8%.
  • Social Security enables you to carry a bit more risk while protecting your liquid assets in case of market volatility or the arrival of unanticipated health-related expenses.
  • Delaying your Social Security benefit can translate into a significant increase in monthly income.
  • Learn more in the UBS Chief Investment Office (CIO) Intellectual Capital blog: 2019 Social Security COLA. (PDF, 231 KB)

Saving for the retirement you want goes beyond your investment portfolio: It also includes all the other financial resources at your disposal. One of those resources is Social Security. While you likely won't need to heavily rely on it as a source of income, your Social Security benefit has the potential to be worth far more than you might think.

That's especially true in 2019 when the Social Security Cost of Living Adjustment (COLA) increases 2.8% (PDF, 231 KB), the largest increase since 2012. While the COLA doesn't provide blanket inflation protection, it's just one of the reasons why Social Security deserves a closer look in your overall retirement strategy. Below are a few more.

Stable income

The amount of your Social Security benefit is derived from your average monthly income over your highest 35 years of earnings. There are many other factors that go into this calculation but that is just where it starts. Once the calculation is complete, the result is your Primary Insurance Amount (PIA)—the amount you would receive if you begin receiving benefits at your full retirement age.

Your full retirement age (FRA) depends on the year you were born, but it is typically age 66 or 67. You can claim your benefit as early as age 62 and as late as age 70. While benefits claimed prior to your FRA will be reduced, benefits will increase every month they are delayed after your FRA. Once you claim your benefit you'll start receiving your calculated Social Security income every month for the rest of your life.

While this source of stable income is a nice boon for many, some retirees aren't maximizing its potential over the long term. According to a study from the National Bureau of Economic Research, over 50% of retirees have enough money in investments and savings to delay claiming their Social Security benefits for two years.1

However, many are claiming the benefits early, before their full retirement age, which can lead to a reduced income benefit each month.

Some inflation protection

Social Security's COLA is calculated by taking the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for July, August and September of each year and comparing it to the three-month average during the same timeframe of the previous year.

While the exact formula can seem a bit convoluted, COLA does provide some inflation protection. That's important, considering inflation risk is a key factor retirees need to prepare for and manage in their investment portfolios. However, you shouldn't rely on a substantial rise in COLA, such as 2019's 2.8% increase, to dramatically improve your spending power.

As Ainsley Carbone, Total Wealth Strategist for UBS, notes: "Social Security's COLA does a reasonable job of tracking economy-wide inflation; however, most retirees will find that it does not keep pace with their own personal expenditures' inflation."

A hedge against longevity risk

While you have planned diligently for the lifestyle you want in retirement, you should be aware of changes in spending patterns and the increased potential for unexpected expenses, such as healthcare costs, as you age. Retirees typically spend more in a few key areas, Carbone says. "Relative to working households, retiree households tend to spend a higher percentage of their consumption on housing and medical care."

Over-spending can create a significant risk to the health of your retirement portfolio, meaning it will be increasingly difficult for you to stretch your nest egg over the remainder of your life. Social Security can act as a buffer and help mitigate longevity risk—the risk of outliving your retirement assets. While excessive spending can deplete other assets, this stream of income is ongoing, so you don't have to be as concerned with making it last for your lifetime. Think of your Social Security as you would a bond in your investment portfolio: It enables you to carry a bit more risk while protecting your liquid assets in case of market volatility or the arrival of unanticipated health-related expenses.

Maximizing your Social Security benefit

If you're approaching or have just entered retirement, there's still time to get the most out of your Social Security benefit.

You aren't required to file for your Social Security benefit right when you retire. Take a look at your current investment portfolio and determine if you can afford to defer your Social Security claim. Delaying your Social Security benefit can translate into a significant increase in monthly income. If your FRA is age 66, delaying your Social Security payments by just one year (until age 67) will result in an 8% increase of your monthly benefit. Deferring payments until age 70 will give you a 32% increase.2

Smart planning and understanding the best ways to maximize your Social Security potential can keep you on track for your ideal retirement and hedge against unexpected expenses that might appear along the way.

Understanding these benefits can help you make the most of your retirement planning. After all, you've spent your working life paying into Social Security—why not use it as part of your financial portfolio to enjoy the retirement you've always envisioned?