By John Drachman
The 5.9% bump in Social Security payments (Cost of Living Adjustment) COLA begins January 1 for 70 million recipients.
According to Mary Johnson, Social Security policy analyst, ‘this is the biggest increase since 1983.” In contrast, recipients saw an anemic increase of only 1.3% for 2021.
The 2022 boost translates into an additional of $92 per payment on average. “Earning $1,657 a month or $19,884 a year from Social Security until death is not bad,” says former investment banker, Sam Dogen of Financial Samurai. “Further, the maximum Social Security benefit increases from $3,148 in 2021 to $3,345.”
Assuming the average person would need some $500,000 earning 4% a year to generate that annual $19,884, Mr. Dogen points out, today’s Social Security beneficiaries can rightly assume “they are half-way to being a millionaire.”
A good thing for beneficiaries, there may still be tax consequences to consider. Of course, whether or not a person pays taxes on their Social Security benefit is a function of their income level. Those who have other sources of retirement income, such as a 401(k) or a part-time job, can expect to pay income taxes on a portion of their Social Security payments. On the other hand, those who rely exclusively on their Social Security checks to put bread on the table receive their benefits tax-free in most cases.
For those on a fixed income, the underlying reason for the 5.9% bonanza cuts both ways: Prices are going up. Both the ongoing pandemic and supply chain shortfalls are contributing to the daily inflationary drum beat. Mark Zandi, chief economist at Moody’s Analytics, said recently, “The price of hotel rooms, for example, has risen 19.6% in the past 12 months. Used car prices have jumped 31.9% because the supply of new cars fell sharply during the pandemic. There is a silver lining, though. Mr. Zandi said he expects the inflation rate to decline to 2 percent in 2022 as the supply and demand equation levels out.
Still higher prices take a significant toll on retirees. Social Security benefits can rise only once a year, while inflation rose .03% last August alone.
While economizing and thrift can help beneficiaries keep up with inflation on their own, viewing increased benefits from any source as part of thoughtful income generation strategy is critical. Even well-off beneficiaries may have to tap more deeply into their savings from time to time. Solutions to income planning challenges are another valuable service provided by licensed financial advisors. If you turn to a professional for help, consider asking them to double check your math on how you are estimating tax payments from your different income sources. The reason: the impact of local laws on Social Security payments varies state by state.
Where Social Security’s 2022 windfall is concerned: While efforts to outpace inflation are good, having a comprehensive income generation strategy is even better.
John Drachman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.