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How to measure the impact of a benefit cut
Covisum, a provider of social security application software, recently updated its calculator to reflect the latest forecasts from social security administrators. The offerings include a free version for consumers and a more complex paid version for financial advisors.
Another product, Maximize My Social Security, allows consumers to explore which claims strategy works best for them for a $40 annual fee. There is also a separate version for financial advisors.
The free Covisum Calculator can help people make a quick calculation based solely on their benefits and a few key facts – year of birth, full retirement age, benefit reduction percentage, and year the benefit reduction occurs.
For example, someone who reaches full retirement age this year can calculate the effect of a 23 percent benefit reduction from 2034 and the effect of no benefit reduction. For each scenario, the calculator shows the drawdown value at either age 65 or 70 and when the beneficiaries will receive the maximum possible amount from the program. As beneficiaries live longer, the value of waiting increases with take-up up to 70, as shown by the difference in overall benefits calculated by the tool.
However, according to Joe Elsasser, founder and president of Covisum, the free calculator is just a place to start when it comes to getting a feel for the trade-offs of applying for Social Security.
Because there are thousands of rules for applying for Social Security, a more in-depth analysis can help determine the best way to get the most out of the program for your unique situation.
Elsasser emphasized that married couples should really coordinate when choosing their social benefits, for example.
“Couples should make the decision together because on the first death, the smaller benefit disappears and the larger benefit remains,” Elsasser said.
Why it’s important to stress test your plan
It’s also important to remember that projections for the current depletion date are subject to change as Social Security trustees change their projections each year.
In addition, Congressional legislation could change the program’s funding status before that date. This may include higher taxes, benefit cuts, or a combination of both. Washington Democrats have put forward proposals calling for a tax hike on the rich along with more generous social benefits.
Elsasser said he’s not necessarily asking his clients to plan for a benefit cut, but that it’s important to gauge the potential impact.
“We advise them to plan according to the rules in force, because in the past there has always been a compromise,” he said. “But then you test the plan under stress and say, ‘Are we okay if we get a benefit cut? And if we do, what is our plan?’”
If the result is not acceptable, it may be time to make changes, e.g. Things like cutting back on spending, saving more, or working longer hours to make sure you can survive those potential cuts, Elsasser said.