Social Security Sends Another Lesson On Why Delaying Is So Important

Before the end of October, Social Security will announce the annual Cost of Living Adjustment (COLA) retirement beneficiaries will get for 2017. Or rather, what they won’t get. Because of the way the COLA is calculated the inflation adjustment is expected to be around 0.2%. Sadly, 0.2% will be better than the 2016 COLA: Zero.

That’s despite the fact that a standard inflation index, called CPI-U is up 1.1% over the past year and another CPI gauge-that removes the cost of food and energy-is up 2.3%. What gives? Well, Social Security uses a specific index, called CPI-W, that tends to lag the other indexes. Moreover, the annual COLA is calculated using the average for CPI-W in the third quarter of the year, and comparing it to the same quarter a year ago. 

Enough with the mechanics, here’s what really matters:  I know it is so frustrating for many senior citizens because their personal inflation rate likely hasn’t been zero over the past two years. The cost of medical care has increased about 4% annualized recently, and prescription drug costs are up more than 3%. And higher-income retirees have likely seen their Social Security benefit decrease, because they pay extra for Medicare Part B and Part D coverage, and those payments are typically deducted directly from their Social Security benefit. (This impacts individuals with modified adjusted gross income of $85,000 and married couples with income of more than $170,000.) 

I wish I had better news for current retirees. But I want to make sure that those of you near retirement learn from all of this. Because the annual inflation adjustment after you begin receiving benefits may not be as generous as you think, it makes it even more important to consider steps you can take to make sure you initially qualify for the largest possible benefit. And that means delaying when you start to receive your retirement benefit. 

You can begin to draw a Social Security retirement benefit when you turn 62. But if you are in good health and expect to live past your 70s I highly recommend aiming to delay starting your Social Security payout until you are age 70. That’s because every month that you delay, Social Security agrees to increase your eventual benefit. If you start at age 70 your benefit will be 76% higher than if you begin at age 62. There is no risk-free investment out there that will generate a 76% return over eight years. (For married couples, the goal is for the highest earner to delay as long as possible; the other spouse can begin collecting earlier if that’s needed.)

That doesn’t mean you must continue to work full time until age 70. You can retire earlier and rely on your savings, or a part-time job to generate the income you are not (yet) getting from Social Security. But if you expect Social Security to be a significant piece of your retirement strategy, waiting to collect the maximum benefit is smart. Especially in those years when the inflation adjustment is non-existent or tiny.