One of the key ways to eliminate financial stress in retirement is to create guaranteed income through investment tools such as annuities, as well as Social Security. For the majority of retirees, Social Security serves as their primary source of guaranteed monthly income. More than 60 percent of retirees receive at least half of their monthly income from Social Security. Importantly, the Social Security program changes over time, and the Social Security Administration recently announced a series of changes for 2021. If you are already retired or plan to retire in the near future, you should pay careful attention to these changes, which include the following:
1. A higher full retirement age
Your full retirement age is the point at which you can receive 100 percent of your Social Security benefits. Of course, if you wait past this point to start claiming your benefits, you can earn more than 100 percent of the total benefit. In 2021, the full retirement age will increase to 66 and 10 months for people born in 1959, who will become newly eligible for the benefit. This change was already announced as part of a larger effort to increase the full retirement age. According to the current plan, the peak will occur in 2022 at age 67 for people born in 1960 or later.
2. A small cost-of-living adjustment
Each October, theSocial Security Administration announces its cost-of-living adjustment. This adjustment is sort of like a raise in that it increases everyone’s benefit as a means of keeping up with inflation. This year, people were nervous about the adjustment given the coronavirus pandemic, but a 1.3 percent increase was announced for 2021. For the average Social Security recipient, this increase will result in an additional $20 or so each month. While any increase is good news, a 1.3 percent boost ties for the second-smallest adjustment in history, and the price of housing and healthcare is increasing by more than that amount each year, so purchasing power is actually going to decrease.
3. An increase in the maximum benefit
This year, maximum Social Security payouts were capped at $3,011 for people of full retirement age. In 2021, the maximum will increase to $3,148. Of course, earning this amount is not an easy feat. To obtain the maximum allowance, you will need to have worked at least 35 years and wait until full retirement ago to claim benefits. In each of the 35 years worked, people will need to have reached or surpassed the maximum taxable earnings cap. The Social Security Administration will only consider an employee’s 35 highest-earning years, so if you worked longer but hit the cap for at least 35 years, you would receive the maximum benefit.
4. A larger Social Security tax
Changes in Social Security do not only affect retirees, but also people working toward retirement. Next year, you will see an increase in the payroll tax earnings cap. This year, Social Security leveraged a 12.4 percent tax on all earned income up to $137,700. Any income earned above that amount is not taxed. In 2020, the 12.4 percent tax will be applied to all earnings up to $142,800, which is a significant jump. At the same time, only about 6 percent of workers will likely hit this maximum, and they will see an increase in of $632 in their payroll taxes over the course of the year. The new upper earning limit is based on the National Average Wage Index, which increased 3.7 percent this past year.
5. A higher withholding threshold
People who apply for Social Security while still working may be surprised to learn that some or all of the benefit can be withheld if they earn above the current income threshold. This year, the threshold is $18,240 annually. Earning more than this amount results in the withholding of Social Security benefits. This threshold is increasing in 2021. Next year, filers will be allowed to earn up to $50,520 before money is withheld. Moreover, the withholding amount is also decreasing next year. Instead of withholding $1 for every $2 earned over that amount, the new policy will be $1 for every $3 earned. Importantly, this earnings threshold does not apply to people at full retirement age, only those who decide to take Social Security early.
6. A more stringent benefit
Retirees do not automatically receive Social Security. This benefit is a reward for paying into the system over the course of one’s career. Starting in 2021, it will become more difficult to qualify for this benefit. In order to qualify, you will need at least 40 lifetime work credits. A maximum of four credits can be earned each year, so you will need to have at least a 10-year work history to receive benefits. In 2020, people received a lifetime work credit with each $1,410 in earned income, so they need to net at least $5,640 to obtain the four credits. In 2021, the new threshold for a credit is $1,470, so you will need to net $5,880 each year.