3 Nasty Social Security Surprises Retirees Could Face | Smart Change: Personal Finances

(Christy Biber)

Most retirees look forward to getting Social Security. Unfortunately, once you go to claim benefits, you might find yourself really disappointed with several aspects of the program.

It’s best to understand the realities ahead of time, so be prepared for these three nasty surprises.

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1. Benefits only replace 40% of pre-retirement income

To be comfortable as a retiree, you should aim to replace around 80% of the income you were earning before leaving work – or more. If you’re hoping Social Security will do it for you, you’re in for a huge financial blow. Indeed, the benefits are designed to replace only 40% of pre-retirement earnings.

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Social Security benefits aren’t meant to be your only source of support as a retiree. The program was designed with the assumption that you would also have a pension and savings, so make sure you actually have extra funds set aside to supplement Social Security. Otherwise, you will have to seriously degrade your quality of life.

2. COLAs don’t keep pace with inflation

Because retirees depend on Social Security throughout their retirement, benefits include cost-of-living adjustments (COLA). Each year, data from a consumer price index is examined to see how much prices have increased from year to year. Retirees then get an increase equal to the amount of inflation indicated by the index.

Unfortunately, there are big problems with this process. First, the consumer price index that has been chosen to measure price growth is the one that tracks the spending habits of urban wage earners and office workers. As a result, it underestimates retiree spending in certain regions that tend to experience higher inflation.

COLAs are undersized most years because of this problem, and benefits have lost about 40% of their purchasing power since 2000, according to an analysis by the Senior Citizens League.

The other problem is that COLAs are calculated using data from the third quarter of the year before the increase takes effect. This year’s increase was determined using data from the third quarter of 2021. Inflation, however, continued to rise after this quarter. This year’s increase was therefore not sufficient. And this same effect occurs every year when there is rapid inflation.

Since retirees receive increases that are too small to keep pace with rising prices, your benefits will pay you less in each year of retirement. You will have to rely more on your savings to make ends meet.

3. FRA is only after 66

Finally, the last big surprise you might face is that you can’t retire with full benefits at age 65. Traditionally, you could, because 65 was the common age for full retirement under Social Security rules. This is why many people still think that this is the classic retirement age.

But changes to Social Security to shore up its financial position gradually pushed FRA later. It is between 66 and four months and 67 for those born in 1956 or later. This means you will either have to wait past age 65 until your FRA or live on reduced benefits.

And if you want to maximize your benefits, you’ll have to wait until age 70 because you can earn deferred retirement credits between FRA and your 70th birthday.

Being caught off guard about when you can apply for benefits or how much they are worth can lead to major financial problems as a senior. The good news is that you now know the basics, so you won’t find any of these facts to be unpleasant surprises as you approach your retirement years.

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