The Social Security Administration announced that it would be increasing benefits by 8.7% in 2023. That is the highest COLA increase in over 40 years.
What is the Cost-Of-Living Adjustment (COLA)?
The purpose of the COLA is to ensure that the purchasing power of Social Security is not eroded by inflation. It is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a COLA was determined to the third quarter of the current year. If there is no increase, there can be no COLA.
History of the COLA
Will Delaying Social Security Cause You to Miss the 8.7% COLA?
Recently, we received a lot of questions on whether it makes sense to take Social Security in November or December of 2022 to avoid missing the massive 8.7% COLA in 2023. The short answer is no. You will not miss out on the COLA if you are eligible to begin benefits. COLAs are added to your primary insurance amount (PIA) even if you haven’t started benefits.
For example, your full retirement age (FRA) is 67 and your primary insurance amount (PIA) is $3,000.
- Age 67 PIA = $3,000
- Age 62 PIA = $2,000
You can start benefits as early as 62, however the monthly amount would be reduced by roughly 30%. If you decide to delay retirement in 2023, your PIA amount would still receive the 8.7% COLA, increasing the PIA amount up to $3,261.
So if you decided to take Social Security at age 63, then the amount would be reduced by the increased PIA amount of $3,261.
What if you are past your full retirement age?
The high COLAs can supercharge your benefits if you delay past full retirement age. Not only will you receive the COLA increase on your PIA, but you will also receive an additional 8% increase for each year you wait until age 70.
For example, you wait one year past your FRA and start benefits at age 68.
- Age 67 PIA = $3,000
- COLA = 8.7%
- COLA adjusted PIA at age 67 = $3,261
- Age 68 = $3,521
- $3,261 x 8% increase
When should you start Social Security?
The decision of when to start Social Security should NOT be based on recent COLA information, no matter how high the COLA is. If you are eligible for Social Security, you will receive the COLA adjustment through your PIA if you have delayed taking Social Security.
There is not a correct answer for everyone on when to take Social Security. There are several factors such as: your health, family longevity, other sources of fixed income, and personal financial situation that must be taken into consideration when determining when to take Social Security for you.
Reach Out to Us!
If you have additional federal benefit questions, contact our team of CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Federal Employee Benefits Consultants (ChFEBC℠). At PlanWell, we focus on retirement planning for federal employees. Learn more about our process designed for the career federal employee.
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