By: James Mahaney
James Mahaney is a vice president with the Strategic Initiatives unit of Prudential.
Though often overlooked, inflation strongly determines how well retirees fare over several decades in retirement. For this reason, people must learn and think carefully about how their Social Security claiming age decision is shaped by inflation.
Social Security benefits are a valuable component of retiring workers’ retirement income plans in any economic environment. In an era of low inflation and low interest rates such as now, Social Security benefits have not declined. By contrast, when inflation and interest rates rise, Social Security benefits are upwards-adjusted by annual cost-of-living-adjustments (COLAs). The COLA benefit for the last decade averaged only 1.69%, but it was much higher – averaging 7.66% – over the period 1975-1984.
Of course, we don’t know what the inflation rate will be in the future, much less over our entire retirement lifetimes. And we also don’t know how much our pension investments will earn for us. Yet something we can do is to focus on keeping as much of our retirement income’s buying power as possible. Delaying Social Security claiming is an innovative strategy to do just that.
First of all, the base benefit rises when claiming is delayed. Recent work shows that annual Social Security benefits bump up by 76% for people who defer claiming from age 62 to age 70. And second, cost of living adjustments along the way will boost initial benefit amounts even more. For example, if an older married couple each earned $100,000 per year and retired at age 62 in 2017, their combined base Social Security benefits would come to about $40,000. But if they waited until age 70, their base benefits would come to about $70,400, on top of which COLAs averaging 3% per year would push starting benefits up to about $89,200 per year. And this higher starting benefit at age 70 is the base for future COLA increases, providing the couple a good inflation hedge.
Even though the annual inflation rate remains below the Fed’s targeted rate of 2% as of June 2017, the Federal Reserve Board has raised interest rates for the third time in the past year. It’s not too soon to focus on how inflation can corrode your retirement income, and what you can do about it.
There are a variety of options to consider when developing a strategy for claiming social security benefits. You should speak to your financial professional about your personal circumstances.
This piece was originally posted on July 24, 2017, on the Pension Research Council’s curated Forbes blog. To view the original posting, click here.
Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.