Here’s How Much the Average Social Security Check Costs in 2022
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With inflation at its highest rate since 1982, the Social Security Administration made a cost of living adjustment (COLA) of 5.9% for benefits paid in 2022. At the end of 2021, the administration Social Security announced that the average benefit for a retired worker would increase by $93, from $1,565 to $1,658, beginning in January 2022. For those receiving the spousal benefit, the average benefit increased from $794 to $841, an increase of $47.
The Social Security Administration ties the cost of living adjustment to the annual inflation rate. By changing the COLA each year to reflect price changes, the Social Security Administration helps ensure that inflation doesn’t eat away at people’s retirement benefits.
If you are not yet retired, you can estimate the amount of your Social Security benefits using the Social Security Administration’s calculator. It’s important to note that while you can start collecting benefits at age 62, if you wait until you reach full retirement age (or beyond), your monthly check will be larger.
While this year’s cost-of-living adjustment helps retirees face higher prices on everything from their groceries to gas bills, the rising cost of Medicare could further reduce people’s monthly benefits.
In 2022, Medicare Part B premiums, which are deducted from retiree Social Security benefits, increased by more than $20, from $148.50 to $170.10. According to AARP, this price increase of $21.60 was the largest Part B base premium increase in the program’s history.
Although the higher Medicare Part B premium may be reversed, retirees will likely still feel the impact of inflation despite the COLA. In December 2021, the year-over-year inflation rate was 7%, with some of the largest price increases seen for used cars and gasoline.
So what can future retirees do about inflation eroding the value of their Social Security benefits?
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Why You Should Top Up Your Social Security Benefits
First, Social Security was meant to complement people’s retirement savings. The National Institute on Retirement Security (NIRS) describes retirement income as a “three-legged stool,” made up of Social Security, a retirement plan, and individual retirement savings through accounts like a 401(k). k) or an individual retirement account.
And most people don’t do very well at saving for the future: A 2020 NIRS study found that 40% of Americans rely on Social Security as their only source of retirement income. The average annual Social Security benefit for a worker is less than $20,000, barely enough money for most retirees to survive.
When it comes to saving for retirement, it’s important to start as early as possible, whether through an employer-sponsored 401(k) or a traditional or Roth IRA. By saving early in life for retirement, you will benefit from compound interest, which is interest earned on interest.
For example, if you started saving for your retirement when you were 25 and your investments have a more conservative return of 6%, you would need to invest $530 per month for 40 years to reach $1 million. If you waited until you were 40 and your investments were earning 6%, you would need to invest $1,500 a month for 25 years to end up with $1 million.
How to start saving for retirement
Although it may seem daunting to start saving hundreds of dollars each month, you can start small and increase your savings rate over time. Experts generally recommend saving between 10-20% of your annual income, but if you have credit card debt or other high-interest debt, you should prioritize repayment before you start investing. .
If your employer matches your 401(k) contributions, you’ll want to focus on maximizing the match. By doing so, you essentially earn free money. A 401(k) is considered a pre-tax retirement account. With a 401(k), the money is automatically deducted from your paycheck and you won’t pay taxes on that income until you withdraw it in retirement.
After maximizing your employer’s 401(k) match, you might consider opening an Individual Retirement Account (IRA). The traditional IRA and the Roth IRA are the two most common types of IRA. For IRAs, the contribution limit is $6,000, but people over age 50 can make catch-up contributions for a maximum limit of $7,000.
Like a 401(k), a traditional IRA is a pre-tax retirement account where individuals pay no taxes on their investments until they withdraw them in retirement. A traditional IRA has no income limit, so it’s available to anyone, no matter how much you earn.
A traditional IRA also offers a tax advantage: Traditional IRA contributions may be tax deductible, depending on your income and whether you have a work-based retirement plan. This means that your traditional IRA contributions can reduce your taxable income, which can reduce the amount of income tax you owe each year you make contributions.
A Roth IRA offers another type of tax advantage. Individuals use their after-tax income to contribute, then their investments grow and can be withdrawn tax-free. A Roth IRA, however, is not available to everyone due to income limits. For 2022, the income limit for single filers is $144,000 and for married couples filing jointly it is $214,000.
When Select analyzed over 20 traditional IRAs and 20 Roth IRAs, it ranked Charles Schwab as having the best traditional and Roth IRAs based on minimum deposit requirement, fees, and variety of investment options proposed.
If you’re new to the world of investing, you might decide to opt for a robo-advisor that will create a portfolio based on your financial goals, retirement horizon, and risk tolerance. Robo-advisors typically invest in low-cost mutual funds and exchange-traded funds. It then uses an algorithm to rebalance your portfolio by periodically buying and selling funds and securities to help you achieve your financial goals.
Select Wealthfront and Betterment ranked among the best robo-advisors based on factors such as types of fees, whether or not there are minimum accounts, and types of investments offered.
At the end of the line
Regardless of the type of retirement account you choose, it’s essential to start saving for retirement as early as possible, even if it’s just a few dollars a month.
While Social Security benefits are adjusted for inflation every year, rising health care costs and the fact that Social Security was only intended to supplement people’s retirement savings mean that you will want to build up a substantial nest egg for your golden years.
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Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.