The average Social Security check is set to jump about $147 next year, thanks to a historic 8.7% cost-of-living adjustment (COLA). It’s exciting news for seniors who already claim benefits, but it raises a question for those who are eligible but haven’t signed up yet: Do they need to claim before the end of the year so they too can enjoy one big benefit increase in 2023?
The answer depends a lot on your personal situation. Here’s what you need to know to make the right call.
How the government applies the COLA to Social Security benefits
When you apply for Social Security for the first time, the government will calculate your primary insurance amount (PIA). It does this by looking at your average monthly earnings over your 35 years of highest earnings, adjusted for inflation. This is known as your average indexed monthly earnings (AIME).
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The government takes your AIME and puts it into the benefit formula effective the year you turn 62. For those born in 1960, the benefit formula is as follows:
- Multiply the first $1,024 of your AIME by 90%.
- Multiply any amount between $1,024 and $6,172 by 32%.
- Multiply any amount over $6,172 by 15%.
- Total the results from steps 1 through 3 above and round down to the nearest $0.10.
The formula for other years is the same. The only thing that changes are the inflection points — $1,024 and $6,172 in the example above. The Social Security Administration maintains a list of bend points for all previous years.
The results of this formula tell you how much you will earn at your full retirement age (FRA). That’s anywhere from 66 to 67 for today’s workforce, depending on your year of birth. This is what the government has added to the 8.7% COLA for 2023, and it happens whenever you claim. If you enroll in 2022 or wait until 2023 or beyond, you won’t miss the benefit boost.
If you sign up it still matters, though
Signing up in 2022 may be a smart choice for some, but that has more to do with their FRAs and their personal circumstances than the 8.7% COLA. If you follow the steps mentioned above, you will know what kind of benefits you can expect from your FRA. But if you choose not to enroll at that age, there’s an extra step in calculating your benefit.
Claiming below your FRA will reduce your benefit by the following amounts:
- 5/9 at 1% per month for up to 36 months
- 5/12 of 1% per month for any additional months if claimed more than 36 months early
For those who enroll right after 62, that means a 25% reduction if your FRA is 66 or a 30% reduction if your FRA is 67.
Alternatively, you can delay benefits beyond your FRA and they will grow by two-thirds of 1% per month until you reach your maximum benefit at 70. That would give you an additional 24% per month. if your FRA is 67, or 32% if your FRA is 66.
The best age to claim usually comes down to your life expectancy and your financial situation. Claiming early usually makes sense if you have a terminal illness or if you’re struggling to pay your bills without Social Security. But for those living at age 80 or older, signing up early can mean settling for a smaller lifetime benefit. Delaying benefits can give you more money overall, but you should be comfortable paying all of your expenses yourself until you’re ready to enroll.
Here’s what you should focus on when deciding whether to sign up for Social Security before 2023. Either way, you’ll get your COLA, but the choice you make can have big consequences for your finances in retirement.
If you need help figuring out your estimated benefits at different starting ages, create an account with my Social Security. There is a calculator out there that can estimate your monthly benefit between 62 and 70. Weigh all your options before deciding how to proceed. It doesn’t have to take long, and even if you decide to claim before 2023, you still have plenty of time left to do so.
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