Social Security benefits will increase in 2023 by the largest spike in decades as Americans cope with high inflation. (iStock)
Although millions of Social Security recipients will see a significant benefits increase beginning January 2023, inflation may eat up most of it, an expert said.
"There’s a reason you’re getting a pay bump," Christian Mills, Reverse Mortgage Funding's head of financial advisor relations, said. "Because everything costs a lot more and inflation is going up. There’s a big trade-off."
The recent increase in the cost-of-living adjustment (COLA) — which will boost the average pay by $140 a month — will be the highest spike in Social Security benefits in 40 years. However, it's uncertain whether inflation will slow down soon.
Inflation increased by 8.2% year-over-year in September, according to the Bureau of Labor Statistics (BLS). In particular, the price of food at home and energy rose by 13% and 19.8%, respectively.
In addition to near-record inflation, Americans are also struggling with major debt. Household debt rose to $16.15 trillion in the second quarter of 2022, according to The Federal Reserve Bank of New York. Credit card balances alone increased by $46 billion to a total of nearly $1 trillion, marking the largest spike in more than 20 years.
To fight inflation, the Federal Reserve has been increasing interest rates and may continue to do so into 2023. This monetary policy could impact Americans' debt balances as interest rates rise on various credit products.
If high-interest debt is getting in the way of your retirement savings, you may consider a personal loan to help pay it off at a lower interest rate. At Credible, you can speak with a personal loan expert to see if this option is right for you.
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How to maximize Social Security benefits
Although Social Security beneficiaries can begin collecting at age 62, they can substantially increase their benefits if they wait until age 70.
"It’s about an 8% raise per year every year you wait after full-retirement age before you hit age 70," Mills said.
Social Security is designed to replace a portion of your pre-retirement income. The amount you receive depends on factors such as the date that you begin collecting payments and your earnings level.
Full retirement age, as recognized by the Social Security Administration (SSA), varies depending on the year you were born.
The full retirement age is 66 for those born between 1943 and 1954. However, it increases slightly to age 67 for those born after 1955. To help people estimate their payments, the SSA released a retirement planner chart.
However, it could be difficult for some to delay collecting Social Security benefits, especially in an uncertain economy and when considering the high costs of health care and potential outstanding debt.
If you're looking to pay off any debt ahead of retirement, you may consider using a personal loan with a lower interest rate to help you save on your monthly payments. A marketplace like Credible can help you compare different loans and rates, without hurting your credit score.
Should you use home equity to delay collecting Social Security?
Homeowners who have been paying down their mortgages may benefit from options like a home equity line of credit (HELOC), reverse mortgage or cash-out refinance.
A cash-out refinance lets homeowners replace their current mortgage with a new, larger loan. They then receive the difference between the new loan amount and the original loan balance in cash.
Homeowners can use this cash for financial planning options, including paying off high-interest debt that may have led them to consider tapping into Social Security benefits early.
But the Consumer Financial Protection Bureau (CFPB) has generally advised against using some home equity options solely to delay collecting Social Security benefits. This is because the overall costs of a home equity option may outweigh the maximum Social Security benefits.
If you’re interested in tapping your home equity to help pay off outstanding debt, you can speak with a loan expert at Credible to see if a cash-out refinance is the right option for you.
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