Isn’t it ironic that time seems to speed up as we get older? Or is that just me? It seems like Labor Day weekend was just last week, but the reality is that we are a week away from Christmas & New Years, which means all the morning talk shows have already started promoting last-minute holiday gifts, tins of cookies and popcorn are showing up in offices, George Michael’s “Last Christmas” can be heard playing on repeat in malls across America, and the holiday frenzy is upon us.
James Brodway and Britney Sandoval from the department of Psychological and Brain Sciences at the University of California, Santa Barbara research formulated a theory that hypothesizes that from childhood to early adulthood, we make fresh experiences and learn countless new skills. But as adults, our lives become more routine, and thus we experience fewer unfamiliar moments. As a result, our early years tend to be relatively over-represented in our memory and, on reflection, seem to have lasted longer.
As the new year approaches, it’s important to be aware of the changes to Social Security, even if you are not retired. Remember, that workers pay Social Security tax (FICA) and every year the income subject to tax changes. For people thinking about filing or who have already filed, the changes may affect you as well–so everybody listen up! Drumroll please for the key changes to Social Security benefits starting in 2019…
1. Social Security Cost of Living (COLA) increase of 2.8%
Every year, the Social Security Administration uses a specific formula to determine whether there should be a cost of living (COLA) change or increase on Social Security benefits and how much. The COLA is based on the Consumer Price Index and tracks the change from the third quarter of the previous year to the third quarter of the current year. The percent change will then be reflected in monthly Social Security benefits payable for the following year. Based on this formula, the 2019 monthly benefits will increase by 2.8%, up from 2% in 2018 and .3% in 2017.
Why this matters? Remember that one of the biggest threats to retirement is inflation or the changes in purchasing power of a dollar. Consider that a McDonald’s Big Mac used to cost $1.60 in 1986 and today costs $5.30! As any self-respecting Big Mac connoisseur will tell you, the sandwich recipe hasn’t changed over the years, but because of inflation, the price has. Inflation affects an individual’s ability to pay for necessities like groceries, goods and services and even Big Macs!
2. The maximum monthly Social Security benefits for an individual in 2019 will increase to $2861 a month.
The maximum increase reflects the new Cost Of Living Allocation (COLA) increase, which is up $39 a month from last year. Although this amount seems like a minor difference, consider that many Americans heavily rely on Social Security benefits as part of their financial planning & retirement income, and this small change could provide more groceries, prescription medicine, and other necessities.
3. If you are turning age 62 in 2019, your Full Retirement Age (FRA) is 66 years old and 6 months
This means that you will be eligible to receive 100% of your full benefit (primary insurance amount/’PIA’) when you turn age 66 and 6 months (for someone turning 62 in 2018, the FRA is 66 and 4 months). Remember that the earliest an individual may file for benefits is age 62, but if you file for benefits in 2019 at age 62, your benefit will be permanently reduced by about 27.5%. If you don’t file until age 70, your benefit will grow by 28%. Why the odd, mid-year FRA? Beginning in 2017, FRA began to increase by 2 months for individuals turning age 62 in that year. This 2-month increase will continue until 2022 when individuals born in 1960 will turn age 62. At that time, FRA will increase to 67 for all individuals born in 1960 or later (until legislation changes the FRA).
4. More of your income will be subject to Social Security/FICA tax
Workers pay a tax on their earnings to fund Social Security. A total 12.4% tax on earnings is imposed on each worker, split equally between the individual worker and the employer. The income cap on earnings subject to this tax increased 3.5% to $132,900 for 2019, from $128,400 in 2018. So far, the tax rate has remained unchanged over the years, but the income cap may increase on a year-to-year basis, which means that more of your income may be subject to the Social Security tax. But if you earn more than the cap, the amount above $132,900 will not be subject to Social Security tax.
5. Earnings test income threshold increase to $17,640
The earliest you may file for Social Security is age 62 (unless you are filing for widow/survivor benefits), but filing early means that the benefit will be permanently reduced by 25-30% depending on your Full Retirement Age. In addition, if you choose to file early and continue working, your earnings will be subject to an earnings test which means that for every $2 of earnings above the income threshold which will be $17,640 in 2019, Social Security will withhold $1 from your benefit check. This income threshold is up from $17,040 in 2018. If you have been collecting benefits and are still working during the year of your Full Retirement Age, $1 of benefits will be held back for every $3 you earn over the threshold of $46,920 (up from $45,360 in 2018). Once you reach Full Retirement Age, the withheld amounts will be added to your benefit check.
As the year comes to an end, spending some time to better understand how social security changes may affect your bottom-line might be time well spent. Or if time is of more value than the cost for you, it might be worth having a conversation with a fee-only retirement advisor.