2021's COLA is 1.3%
Instead of taking this year's 1.3% COLA for face value, it's important to take the time to understand how the increase stacks up relative to your personal expenditures. Looking at household income in comparison to expenses allows for a better understanding of true purchasing power.
For instance, while retirees can expect a 1.3% increase in their gross income from Social Security, that won't necessarily yield a 1.3% increase in net benefits. That's because Medicare Part B premiums are typically deducted directly from retirees' Social Security payments. Whenever there are increases in Part B premiums from one year to the next, those increases eat into Social Security's COLA. And since these premiums are one of the fastest-growing costs for older Americans, it's no wonder why Social Security benefits have been struggling to keep up with retirees' expenses.
Any raise or COLA to your income, whether you're still working or retired, will certainly help cover expenses more than receiving no increase at all. But, to what extent? In order to answer that question, you'll need to review how all income has adjusted relative to all expenses. Before you work with your financial advisor to decide how much you need to set aside in your Liquidity strategy,* make sure to look back on what you spent last year and consider how your spending may change in the years ahead (please see Liquidity strategy: Refilling for 2021 and beyond for more considerations).
* Timeframes may vary. Strategies are subject to individual client goals, objectives and suitability. This approach is not a promise or a guarantee that wealth, or any financial results, can or will be achieved.
When should you claim Social Security?
If you're 62 or older and haven't started receiving Social Security yet, you still benefit from the current COLA since it raises your future payments. What's more, every month you delay your payments (up to age 70), you're increasing your future Social Security benefits for life. Even still, many retirees choose to claim Social Security before their full retirement age, which can result in a significant reduction in lifetime benefits.
But, the decision of claiming now or later shouldn't be based on maximizing an individual's forward-looking payout in isolation. It's important to consider how Social Security can be used, as part of the overall investment plan, to reach the best outcome for the family.
We suggest a dynamic claiming approach that enables households to mitigate longevity risk and sequence risk while also maximizing the expected value of their benefits. This can be done by delaying filing until the first of reaching age 70 when delayed retirement credits are at their maximum, or experiencing a bear market at which point Social Security could be turned on to support the Liquidity strategy to give risk assets in your Longevity portfolio time to recover.
For an even more dynamic approach, households can stage when each spouse claims Social Security to maximize the overall value of the longevity hedge while also protecting their liquid financial assets early in retirement. For married couples who are looking to coordinate their claiming strategies, see our blog " Social Security's spousal benefits" to see how these benefits are affected. And keep in mind that Social Security benefits can extend beyond an individual's lifetime, so be sure to consider how your claiming decision will impact potential survivor benefits before submitting your Social Security application.
Main contributors: Ainsley Carbone and Justin Waring
Read the full report Modern Retirement Monthly: 2021 Retirement Guide 8 January 2021.
This content is a product of the UBS Chief Investment Office.