Get in the Know: Social Security and IRS Updates for 2018
The new year will bring several changes that could affect your Social Security benefits and retirement savings.
Last October, the Social Security Administration announced cost-of-living adjustments for 2018 benefits. Starting in January, monthly Social Security and Supplemental Security Income (SSI) benefits will increase by 2.0 percent,1 which will yield approximately $25 extra a month for the average beneficiary.2
For individuals still in the workforce, the maximum amount of earnings subject to the Social Security tax will increase from $127,200 to $128,700. This increase will cause about 12 million American workers to pay more in Social Security taxes.3
From a retirement savings perspective, there is some good news from the IRS in 2018: Employees may increase 401(k) contributions to $18,500 — a $500 boost over the past few years. The maximum contribution (employer and employee combined) will increase by $1,000 for a total of $55,000 a year. Unfortunately, there is no change for the “catch-up” contribution for people age 50 and older, which will remain at $6,000.4
IRA contributions, including the catch-up provision, will also stay the same at $5,500 and $1,000, respectively.5
1 Social Security Administration. Oct. 13, 2017. “Social Security Announces 2.0 Percent Benefit Increase for 2018.” https://www.ssa.gov/news/press/releases/#/post/10-2017-1. Accessed Nov. 16, 2017.
2 Newsmax.com. Oct. 13, 2017. “Social Security Benefits to Get Another Modest Boost in 2018.” https://www.newsmax.com/US/social-security-cost-of-living-adjustment-cola-2018/2017/10/13/id/819445/. Accessed Nov. 16, 2017.
3 Emily Brandon. U.S. News & World Report. Oct. 16, 2017. “Social Security Changes Coming in 2018.” https://money.usnews.com/money/retirement/social-security/articles/2017-10-16/social-security-changes-coming-in-2018. Accessed Dec. 11, 2017.
4 IRS. Oct. 19, 2017. “IRS Announces 2018 Pension Plan Limitations; 401(k) Contribution Limit Increases to $18,500 for 2018.” https://www.irs.gov/newsroom/irs-announces-2018-pension-plan-limitations-401k-contribution-limit-increases-to-18500-for-2018. Accessed Dec. 11, 2017.
Steps for Building a Retirement Income Plan
Not everyone has dramatic success as an investor. For many, the key isn’t to have great stock market insights or great luck, but rather the foresight to consistently invest in regular installments over a decades-long timeframe. This is a prudent and time-tested means to accumulating a nest egg for retirement.
However, growing assets in a retirement investment portfolio is different from creating a retirement income plan. Ultimately, the goal is to provide an enduring stream of income in retirement, and to do that, retirees must have a well-thought-out strategy for how to withdraw their accumulated assets. This includes considering ways to help reduce taxes.
Here are two ways to approach a retirement income plan. The first is to figure out how much money you will need to live on during retirement. Many people put together a list of expenses based on their current household spending, making adjustments for things like less money spent on mortgages, clothes and transportation and allocating for higher spending on entertainment (initially), health and long-term care expenses (eventually). Then they position their financial portfolio in an effort to meet that monetary goal.
Another way to approach retirement spending is to figure out how much income you can reasonably expect based on your current income, savings rate and accumulated assets. For many people, Social Security represents a large portion of their retirement income. One source to help determine how much income you’ll receive in retirement is the Social Security Administration’s “Retirement Estimator.” This is an online tool at www.ssa.gov that requests personal information (including prior year taxable income) to verify your identity. It then provides an estimate of your benefits payable beginning at retirement age 62, 67 or 70.1
Once you’ve estimated how much your income resources may provide, you can adjust your retirement lifestyle accordingly. If you don’t perceive having enough income to provide for the lifestyle you enjoy prior to retirement, it may be wise to consider “downsizing” before the big day.
By downsizing early on, you may be able to reposition current assets — such as a large family home, second home, boat or other high-ticket item — to another financial vehicle designed to provide retirement income. The earlier you do this, the more time that alternative financial vehicle may have to potentially grow.