How Will Social Security Change in 2023?

The Social Security Administration (SSA) has announced that there will be several changes to benefits in 2023. According to them, these changes are necessary for ensuring the program’s long-term stability. 

In this blog post, I’ll take a closer look at what the changes may entail—and how they could affect (even affluent) investors. I may share more insights in the coming weeks, as well.

Please explore these issues with us: 

• Social Security’s 2023 COLA summarized
• Taking benefits early vs. waiting for them fully
• Your benefits may not fund a comfortable retirement
• Even the affluent should plan out supplemental income

Social Security’s 2023 COLA Summarized

Social Security’s Cost-of-Living Adjustment (COLA) for beneficiaries in 2023 will be 8.7%, effective for monthly benefits starting in January 2023. This is the largest monthly COLA since 1982, reflecting the current inflation level. 

The Social Security Administration uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to calculate the COLA. The CPI-W is a measure of inflation based on the prices of goods and services purchased by urban workers. For example, it might compare a common grocery store item’s cost now vs. last year.

While this boost may be positive news for seniors, it is important to remember that COLAs can only keep up with inflation; they don’t provide additional income. Anyone who is counting on Social Security to cover a large portion of their expenses in retirement must plan for the possible shortfall. 

Taking Benefits Early vs. Waiting for Them Fully

Most financially independent people choose to wait until they reach full retirement age before taking social security benefits. By doing so, they maximize the amount of money they will receive each month. However, there are some situations in which it could make sense to take benefits early. 

For instance, if someone is in poor health and doesn’t expect to live for many more years, he or she may start receiving benefits earlier. Doing so would allow them to collect for a longer period of time. Generally speaking, if you are in a lower tax bracket, it may be beneficial to start collecting benefits early for you. 

However, many people are unaware of the potential downside of taking Social Security benefits early: Benefit checks are taxable, so it’s always a good idea to look before you leap in terms of when you opt to collect. Especially if you are in a higher tax bracket now, it may be better to wait until you reach full retirement age. 

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Your Benefits May Not Fund a Comfortable Retirement

A comfortable retirement is something that most Americans hope to achieve. Nevertheless, recent reports suggest that Social Security benefits may not be enough to fund a comfortable retirement. By “comfortable,” I mean “in keeping with a quality level that most affluent Americans are accustomed to taking for granted.”

Some retirees wind up having to cut back during their golden years, downsizing their homes, or even going back to work to make ends meet. Part of this is because anyone dependent on Medicare loses their withholding before they ever get the payment. The other part is that inflation is shrinking the value of everyone’s money.

In either case, when you consider the distinct possibility that there won’t be a Social Security benefits COLA for 2024, you see the problem: Benefits checks may barely keep pace with inflation’s effects in 2023. If the costs of food and other necessities keep outpacing them, they’re all but certain to fall behind sooner or later.

I’ve said before that I don’t think Social Security is likely to disappear entirely. At the same time, it bears mentioning that in the not-so-far future, a recipient’s monthly benefits may only cover a single week’s worth of living expenses. In other words, planning a high-net-worth retirement that doesn’t need Social Security benefits for a significant portion of your income is a wise idea.

Even the Affluent Should Plan Out Supplemental Income

I know this isn’t comforting news, but I’m a yank-the-Band-aid-off kind of guy; I’d rather get the bad news over and done with first. According to some estimates, the average Social Security benefit will only replace about 40% of some people’s pre-retirement income. 

Sadly, this could become a generous estimate. For many retirees, the shortfall will need to be made up through some combination of pensions, investments, and part-time work. Additionally, even a high-net-worth individual should plan for a supplemental income to cover their Social Security benefits’ shortfall. 

You may have a larger nest egg to draw from, but you will still need to be mindful of how much you are pulling out each year. Otherwise, you run the risk of quickly depleting your retirement savings (if not entirely, to the point of having to cut back on the kinds of luxuries that you enjoy now). 

Holding stocks and bonds may help, but retirement accounts need financial planning to diversify them for today’s market, as well: A fiduciary financial planner can recommend potential alternative investments like real estate and other investable assets like commodities. 

At the same time, you also need to consider how supplementing your benefits with other income sources can affect your taxes. Again, according to the IRS, any income you receive from Social Security is considered taxable. When you have, let’s say, a pension and an investment portfolio, you are required to pay taxes on both your benefits and those sources of income. 

Meanwhile, the amount of taxes that you owe on your Social Security benefits will increase if your combined income exceeds a certain threshold. As a result, it’s important to discuss your specific situation with a tax-savvy professional. They can help you make solid financial decisions without paying more than the correct amount of taxes.

Heritage Capital, LLC has been helping Connecticut residents plan their retirement, invest for wealth accumulation, protect their assets, and more with an eye on limiting their tax liability for decades. I’ve recently added Accredited Investment Fiduciary® (AIF®) to my certifications, as well, to help you retire with confidence in Woodbridge and elsewhere.

I’m not sure I know anyone who likes a hard-sell approach. That’s why we offer free, no-commitment consultations—and you’re never obligated after that: We prefer working with clients who value our services, not people who’re trapped in a burdensome contract. Contact us to learn more.