We just found out that Social Security benefits are going up 1.3% in 2021. In this post, I want to talk about three things:

1) What does this mean for people receiving Social Security in 2021? Is it really 1.3%?

2) If I’m planning for retirement, what Social Security increases should I assume every year?

3) We’re going to look at a case study, an example, of using historical averages for what Social Security will go up in our retirement simulations.

Whether you’re retired or you’re 10 years out from retirement, Social Security is one of your biggest assets. So keeping up to date with how it works is really important to your financial plan.

According to the Social Security Fact Sheet on ssa.gov, Social Security income beneficiaries will receive a 1.3% COLA – not a soft drink, but a cost-of-living adjustment – in 2021. So, it’s a pay raise.

The average person receives about $1,500 a month in Social Security benefits. A 1.3% increase means about a $20-a-month increase. So, that’s good; now I can upgrade my Netflix subscription from Premium to Ultra. But here’s the thing: when Social Security goes up, and we’ve seen this time and time again in helping families plan for retirement, your Medicare premium goes up as well.

Now, we don’t know how much Medicare’s going to go up next year. For Medicare Part B, back in April, the Medicare trustee report said they think benefits are going to go up by $8 a month per person. So you hit that $8 and all of a sudden that’s taking away from your 1.3% COLA. I would say the net effect of Medicare and Social Security together is actually only a 0.8% increase.

Why is this important?

If you’re planning ahead and you’re running retirement scenarios, which you should do, it’s important to know what growth rate to assume for Social Security in the future. So, my first thought was to take a look at history because we can use history as a guide, though not a guarantee, as far as what Social Security will do in the future.

I looked all over the internet for a historical average of Social Security COLAs and I couldn’t find one, so I made one. And since 1975, when the cost of living adjustment law came into effect, we’ve been keeping track of those averages. That average comes out to 3.6%.

You could be a little conservative and estimate Social Security will go up 3% a year. Well, this year has historically low interest rates and we have a historically low Social Security COLA.

Should we use 3%, even though that’s a conservative number moving forward? I’m going to show you a case study that says, I’m not sure if we should.

I’ve got this family here: Stan and Joanna. They’re about 10 years out from their retirement age of 65, they have three kids, and their net worth is right around $2 million. Right now they make $350,000 of combined-growth income, and they’re projected to receive about $50,000 a year in Social Security when they retire.

Let’s look at Stan first, and assume his benefit is going to grow 3% per year until retirement. Currently, they have about $10,000 in monthly expenses plus their mortgage, which is pretty big. And then in retirement, they think they’ll have about $100,000 a year in expenses.

In looking at their long-term financial plan, all of these expenses and income and investments are being factored into the picture which you can see in the video. And the picture looks good based on a 3% cost-of-living adjustment on their Social Security.

You can even run a test and determine what is the percentage chance that you’ll need to make an adjustment during the next 30 or 40 years into retirement? And based on this scenario, the chance of needing to make an adjustment is only 3% because it’s a 97% success rate.

However, what happens if we change this to Social Security with no COLA, which is 0% (because this year it’s really close to zero). When running scenarios, should we use historical averages? Or should we go with Medicare and Social Security moving in tandem with one another – as the benefit from one goes up, the cost from the other goes up – so this might be the safer way to go. In this case, the long-term plan goes from a 97% success rate down to 74%.

In this scenario, there’s a 1 in 4 chance I’ll need to make a big adjustment between now and retirement, or maybe even in retirement, meaning:

  • I need to work longer, or
  • lower my expenses in retirement, or
  • save more now.

These are all doable things, but this shows you that the change in value of their net worth over time was 2.7 million upon assuming 0% versus 3%.

So, again, if you’re planning for retirement, knowing what Social Security’s impact is on your situation is huge for a lot of Americans.

If you have any questions on this, feel free to reach out to us. Or talk to your financial planner and ask how they are assuming Social Security is going to grow over the next 20 or 30 years and maybe assume zero, just to be safe.