Retirement means many things for people, whether it be spending more time with family, getting out and playing eighteen more often, or cashing out on a little bit of that hard-earned Social Security money that they have worked for their entire life. For generations, this payout has been a guarantee and retirees have continuously seen the benefits that the system was put into place to create.
Unfortunately, times are changing, and they are changing quickly. According to a report released in 2019 by the trustees of Social Security and Medicare, 2020 is expected to be the first since 1982 that the costs of Social Security (benefit payouts and administrative costs) will exceed its income, requiring the program to draw from its trust fund of nearly $3 trillion. This fund is expected to cover benefits until 2035, at which point benefits will not be able to be paid out at their full amounts. Let’s take a look at the trends impacting Social Security today and how financial planning gains emphasis to prepare for tomorrow.
Trends impacting Social Security
A number of factors are contributing to the challenge faced by Social Security, but two stand out in particular.
First, is an increase in longevity. We have seen client longevity be a key trend that independent financial advisors are watching and while this is certainly a positive trend for us as humans, it does present a new set of financial challenges. Today, retirees are living longer and taking a larger sum of benefits than in the past, placing a greater strain on the program’s funding.
Second, is that there is now an imbalance in the number of workers contributing to Social Security in comparison to the number of retirees collecting benefits. This trend is expected to continue as the 2018 ratio of contributors to collectors of 2.8:1 will fall to 2.2:1 in 2036.
Changes coming to Social Security in 2020
Thankfully, Social Security ended 2019 on a strong note and avoided the trustees’ projection that last year would be the first to experience a net-cash outflow. The program’s investment holdings were able to grow by $2.3 billion, but many still expect 2020 to be the year that the program is required to dip into its trust fund.
For the 64 million Americans that currently collect a monthly payout, changes have already arrived for the new year. There are six items that took effect on January 1, 2020:
Cost-of-living adjustment (COLA) of 1.6 percent
Beneficiaries received an increase of 1.6 percent to their monthly benefits as a result of the annual cost-of-living adjustment. This equates to a $24 increase per month for the average Social Security collector.
Maximum taxable earnings rose to $137,700
Though the Social Security tax rate remains steady at 6.2 percent, the taxable income cap rose by $4,800 from last year’s cap of $132,900.
Full retirement age rose by two months
While the earliest age that Social Security benefits can be claimed is 62, there is a permanent reduction penalty for those who do so at this age. To claim full benefits, an individual must reach their “full retirement age.” Those turning 62 in 2019, their full retirement age is 66 and six months, which increases to 66 and eight months for those turning 62 in 2020.
Increase in earnings limits
For those who continue working while collecting benefits, part of the payouts can be temporarily withheld depending on earnings. This earnings limit has increased in 2020 allowing beneficiaries to earn up to $18,240 before a $1 deduction is made on every $2 earned. The new limit is a $600 increase over last year’s limit of $17,640.
Increase in disability benefits
2020 brings an increase for the nearly 10 million Americans receiving Social Security disability benefits. The legally blind now receive a $70 increase per month for a new maximum of $2,110 and the non-blind now receive a $40 increase per month for a new maximum of $1,260.
Increase in credit-earning threshold
In order to qualify for Social Security benefits, you must earn a minimum of 40 credits in your working lifetime with a maximum of four per year. The amount it takes to earn one of these credits increased by $50 in 2020 to $1,410.
Financial planning gains emphasis
Though the fate of Social Security is cloudy, it will not vanish completely overnight. Instead, the dwindling funding will result in benefit reductions if these trends continue and no additional funding sources are dedicated to the program. While some is better than none, future retirees need to be conscious that their Social Security benefits may not be as reliable as they were for previous generations. This places a greater emphasis on comprehensive financial planning tactics to ensure that retirement is secure.
Financial advisors who are equipped to construct advice with the precision of cash flow analysis will be in an excellent position to handle the possibility of decreased Social Security payouts. NaviPlan arms advisors with this ability, resulting in holistic financial plans that can be adjusted with precision based on market trends and every rotating cog in their client’s unique financial situation.
A strong financial plan is one that is dynamic and can flex to account for the uncertainties of life – in this case, the future of Social Security. Not only does it help ensure that clients are able to live comfortably in the future, it justifies the advisor’s actions and demonstrates their worth to a client.
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