The average Social Security check is expected to jump about $147 next year, thanks to a historic 8.7% cost-of-living adjustment (COLA). This is great news for seniors who are already applying for benefits, but it raises a question for those who are eligible but have not yet registered: should they apply before the end of the year so that they too can benefit from a substantial increase in benefits in 2023?
The answer depends a lot on your personal situation. Here’s what you need to know to make the right call.
How the government applies COLA to Social Security benefits
When you first apply for Social Security, the government calculates your Primary Insurance Amount (PIA). It does this by looking at your average monthly earnings over your 35 highest earning years, adjusted for inflation. This is called your average indexed monthly earnings (AIME).
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The government takes your AIME and incorporates it into the benefit formula in effect for the year you turn 62. For people born in 1960, the benefit formula is as follows:
- Multiply the first $1,024 of your AIME by 90%.
- Multiply any amount between $1,024 and $6,172 by 32%.
- Multiply any amount over $6,172 by 15%.
- Add the results from steps 1-3 above and round to the nearest $0.10.
The formula for the other years is quite similar. The only thing that changes are the bend points – $1024 and $6172 in the example above. The Social Security Administration maintains a list of endpoints for all previous years.
The results of this formula tell you how much you will receive at full retirement age (FRA). That’s between 66 and 67 for today’s workers, depending on your year of birth. This is what the government adds the 8.7% COLA for 2023 to, and it happens no matter when you claim it. Whether you enroll in 2022 or wait until 2023 or beyond, you won’t miss this increase in benefits.
The timing of your registration is still important, however
Enrolling in 2022 might be a smart move for some, but it has more to do with their FRAs and personal circumstances than the 8.7% COLA. If you follow the steps outlined above, you will know what kind of benefit you can expect from your FRA. But if you choose not to enroll at that age, there’s an extra step in calculating your benefits.
Applying under your FRA reduces your benefits by the following amounts:
- 5/9 of 1% per month up to 36 months
- 5/12 of 1% per month for any additional month if the request is anticipated by more than 36 months
For those who enroll immediately at age 62, this means a 25% discount if your FRA is 66 or a 30% discount if your FRA is 67.
On the other hand, you can delay benefits beyond your FRA and they will increase by two-thirds of 1% per month until you reach your maximum benefit at age 70. This gives you an additional 24% per month if your FRA is 67, or 32% if your FRA is 66.
The ideal age to claim often depends on your life expectancy and your financial situation. Claiming early often makes sense if you have a terminal illness or are struggling to pay your bills without Social Security. But for those who live to be 80 or older, enrolling early could mean settling for a smaller lifetime benefit. Delaying benefits might give you more money overall, but you need to be comfortable paying all your living expenses yourself until you’re ready to enroll.
That’s what you should focus on when deciding whether to enroll in Social Security before 2023. Either way, you’ll get your COLA, but the choice you make could have a huge impact on your retirement finances.
If you need help determining your estimated benefits at different starting ages, create a my Social Security account. There is a calculator that can estimate your profit every month between 62 and 70. Weigh all your options before deciding how to proceed. It shouldn’t take long, and even if you decide to claim before 2023, you’ll still have plenty of time to do so.
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