As we move past the halfway mark of 2024, it’s crucial for both American workers and future retirees to start preparing for some significant Social Security changes coming next year. These changes could impact not only when you can claim your benefits but also the amount you will receive in 2025.
Unluckily, these adjustments aren’t favorable for seniors, making it essential to start planning now to avoid a financial setback. Let’s dive into the major changes and understand how they might impact you.
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Social Security change in 2025
The most substantial change affecting Social Security in 2025 is the shift in the full retirement age (FRA). This adjustment impacts individuals who have not claimed their retirement benefits yet but are planning to do so in the near future.
To grasp why this change is significant, it’s important to understand what the normal retirement age is. Basically, it is the age at which you must claim your first Social Security check to receive the full amount, that is, 100%.
If you claim benefits before reaching your FRA, your benefits will be reduced due to early filing penalties. Conversely, if you wait beyond your FRA to claim, your benefits will increase through delayed retirement credits until you turn 70.
Here’s a breakdown of what you need to know:
- Full Retirement Age (FRA): The age at which you receive your full Social Security benefit amount without any reductions or increases.
- Early Filing Penalties: If you claim benefits before your FRA, your monthly benefits will be reduced.
- Delayed Retirement Credits: If you delay claiming benefits beyond your FRA, your monthly benefits will increase.
Understanding these concepts is crucial for making informed decisions about when to claim your Social Security benefits. With the FRA moving later, it’s more important than ever to plan ahead and consider how these changes will affect your retirement strategy.
The concept of Full Retirement Age (FRA) is undergoing significant changes starting in 2025. If you turned 66 in 2024, your FRA is 66 years and 8 months. However, if you’re reaching 66 in 2025, your FRA will be extended to 66 years and 10 months. For those who will turn 66 in 2026 or later, the FRA will be set at 67 years old. This adjustment in the full retirement age is crucial for retirees deciding when to claim their benefits.
Understanding the Impact of FRA Changes
Claiming your benefits even a single month before reaching your new FRA will subject you to early-filing penalties. To avoid these reductions if you turn 66 next year, you must wait until you are 66 years and 10 months old. The penalties are structured as follows:
- A decrease of 5/9 of 1% for each of the first 36 months you receive benefits before reaching your FRA.
- A decrease of 5/12 of 1% for any additional month beyond those first 36 months.
- Filing at 62 can mean a 30% reduction.
Making an Informed Decision
These changes to the FRA present you with two challenging options:
- Work an extra few months to avoid the early-filing penalties.
- Claim your benefits earlier and accept a permanent reduction in your monthly benefits.
Given the significant impact on your financial future, it is essential to make an informed decision. Understanding how the FRA is evolving will help you navigate these changes effectively and choose the best path for your retirement.
Are you planning to claim Social Security next year? If so, it’s crucial to start preparing for some significant changes now. These changes might impact the exact timing of your retirement. If you find yourself needing to work a few extra months compared to peers who turned 66 earlier, it’s better to adjust your plans now rather than counting down to retirement only to realize too late that you didn’t account for the 2025 adjustments to the full retirement age.
Lower Social Security 2025 COLA
Retirees who are already receiving Social Security benefits should also brace for another important change. In 2025, the Cost of Living Adjustment (COLA) is very likely to be smaller than the increases seen in recent years. The Senior Citizens Leagues made a prediction and it is of about a 2.63% increase.
COLAs are determined by inflation rates. Preliminary data indicates that this year’s inflation rates are significantly lower compared to the past few years. As a result, seniors can expect a smaller benefits increase than they might be anticipating. To put this into perspective:
- Retirees received a 3.2% benefits increase this year.
- In 2023, the increase was 8.7%.
- Back in 2022, there was a 5.9% boost in their checks.
Experts are now predicting that the COLA will be just 2.63% in 2025.
What This Means for You
It’s no secret that Cost-of-Living Adjustments (COLAs) have struggled to keep up with the actual inflation rates that most retirees face. The root problem lies in the fact that COLAs are calculated using a price index designed to track the spending habits of urban wage earners and clerical workers.
However, seniors have a different basket of goods and services, leading to smaller raises and a significant loss in buying power—36% since the year 2000. And a more recent report from SCL claims there has been a 20% loss in buying power since 2010.
Source: https://seniorsleague.org/benefits-20-of-buying-power-since-2010/
Why COLAs Fall Short for Seniors
Understanding why COLAs fall short is crucial for retirees. The current price index does not accurately reflect the spending patterns of seniors, who often face higher healthcare costs and other expenses not as prevalent among urban wage earners. This mismatch means that the benefit increases seniors receive are not sufficient to cover their rising costs.
Preparing for Changes in 2025
As we look ahead to 2025, seniors must brace for a potentially smaller COLA adjustment. Planning ahead is essential to mitigate the impact of reduced benefits and diminished buying power. Consider these steps:
- Review and adjust your budget to account for smaller benefit increases.
- Explore alternative sources of income or savings to supplement Social Security.
- Keep an eye on healthcare and essential expenses, as these may disproportionately affect your financial situation.
Strategic Financial Planning
By taking proactive measures, you can position yourself to handle these changes more effectively. Whether it means delaying your Social Security benefits or finding ways to manage with less, preparing now can help you stay ahead financially. The key is to be aware and ready for what’s coming so that you can maintain your financial stability.
In summary, the upcoming changes to COLA in 2025 signal the importance of strategic financial planning for seniors. By understanding the shortcomings of the current system and preparing accordingly, you can safeguard your financial future and ensure that you are better equipped to handle the challenges ahead.