Social Security and Inflation

Last week it was announced that there would be an 8.7% increase in Social Security benefits next year on top of last year’s increase of 5.9%.  Now the good news is that there will be an increase, the bad news is that inflation is running at much the same level, so its safe to say at best we’re treading water.  On the flip side if you have a corporate pension, it is highly unlikely you’ve seen any increases at all.

Corporate Pensions

I was fortunate to have a pension from a previous employer which I started at age 50.  Over the last 20 years my monthly check has remained the same, but due to inflation what cost $1.00 in 2002 would now cost $1.65 or another way of looking at is, is that I’ve seen the value of a dollar decrease to 65 cents.

What’s enlightening is that inflation over the past 20 years has averaged 2.54%, which is not much higher than the Federal Reserve’s targeted amount of 2%.  Over the last 2 years however we’ve seen the CPI increase by 4.7% in 2021 and 8.2% this year, which is why we’ve seen the Fed dramatically trying to bring inflation under control by increasing interest rates.

Inflation by Spending Category over the last 20 years

  • Gas prices increased from $1.14 per gallon to $3.88
  • Bread prices increased from $1.00 per loaf to $1.76
  • Egg prices increased form $.97 per dozen to $2.90
  • Chicken prices increased from $1.09 per pound to $1.89
  • Electricity prices increased from $.09 per KwH to $.17
  • Medical care inflation has averaged 3.28% thus what cost $1.00 now cost $1.91

Back in the 70’s when I was a stockbroker with EF Hutton, I often told my clients (Greatest Generation) that they paid more for their last car than they did for their 1st house.  If you’ve shopped for a new car or truck recently, that same statement is as true today for us Baby Boomers!

What’s Your Check Out Date?

Many people ask me when they should claim Social Security benefits?  I ask the simple question above!  Since we don’t know and probably wouldn’t want to know even if we could, all we can do is look at life expectancy tables.  If a couple is 65 today, there is a 50% probably that one spouse will live to age 92 and a 25% probability of one living to age 97.  Now remember these are averages, are you average?  I always ask about the age of one’s parents if still alive, if deceased, I ask at what age did they die?  In my case my father died at age 87 and I visited my, soon to be 96 year old mother last week in Wisconsin.  It is fair to say if your parents lived into their 80’s & 90’s might you live the same or longer?

The Magic of 70

As I often written over the past 10 years the importance of having the higher earning spouse delay claiming Social Security benefits until they reach age 70.  Yes, you can claim Social Security benefits at age 62, if your retired or keep your earned income below $19,560 per year.  Over 40% of American’s still claim upon attaining this age and over 90% will claim at or prior to their Full Retirement Age.  Only about 4% of American’s wait until their 70th birthday to claim.

  • If your check at age 62 is $2,000 per month, your check at age 70 will be >$4,000 per month assuming a 2% COLA.
  • You worked 40 years to get X $ per month, if you wait 8 more years you get X times 2!
  • The breakeven is approximately 10 years assuming a 2% COLA, if the COLA is greater the breakeven is shorter!
  • If you claim at age 62 and your check is $2,000 per month next year your check will be $2,174 next year, if you waited until 70 your check will be $4,348.
  • If you are at FRA (Full Retirement Age) you will be credited 8% per year over the next 4 years + any COLA adjustments.
  • The difference in monthly checks at age 85, assuming a 2% COLA can be $2,500/mo. or $30,000/yr.
  • The surviving spouse inherits the greater of the two benefits upon the death of the other spouse, thus if the husbands earnings record is higher and he waits until 70 before claiming his spouse will inherit his benefit upon his death.

The greatest risk in retirement is not dying too soon, it’s living too long!  With Halloween right around the corner don’t make a mistake of claiming too soon and having this Horror Show repeat itself for decades to come!  Measure twice, measure three times saw once!

No Mulligans,

Dave Zander, CFP®
MLS# 1603774