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How to measure the effects of a reduction in benefits
Covisum, a provider of Social Security claim software, recently updated its calculator to reflect the latest projections 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 assess, for a $40 annual fee, which claims strategy would be best for them. It also has a separate version for financial advisors.
The free Covisum calculator can help people do a quick calculation based on just their benefits and some key facts – year of birth, amount of full age pension, percentage of benefit reduction and year of reduction benefits.
So someone reaching full retirement age this year, for example, can calculate the effect of a 23% cut in benefits from 2034, as well as the effect of no reduction of benefits. For each scenario, the calculator will indicate the value of the claim at age 65 or 70, and when beneficiaries will get the maximum possible amount from the program. As beneficiaries live longer, the value of waiting until age 70 to claim increases, as shown by the difference in total benefits according to the tool’s calculations.
According to Joe Elsasser, founder and president of Covisum, the free calculator is just a starting point to get a sense of the trade-offs when applying for Social Security.
Because there are thousands of Social Security claim rules, further analysis can help identify the best way to get the most out of the program for your unique situation.
For example, married couples should really coordinate their benefit choices, Elsasser pointed out.
“Couples should make the decision together because on the first death, the smaller benefit disappears and the larger benefit continues,” Elsasser said.
Why stress testing your plan is important
It’s also important to remember that current exhaustion date projections are subject to change, as Social Security administrators change their projections every year.
Additionally, congressional legislation could change the funding status of the program before that date. This may include higher taxes, benefit cuts, or a combination of both. Washington Democrats have introduced proposals that call for raising taxes on the wealthy while making benefits more generous.
Elsasser said he doesn’t necessarily tell his clients to plan for a reduction in benefits, but that it’s important to assess the potential impact.
“We advise them to plan according to the current rules, because in the past there has always been a compromise,” he said. “But then test the plan and say, ‘Is it okay if we get a reduction in benefits? And if we do, what is our plan? “”
If the outcome is unacceptable, it may be time to make changes such as cutting expenses, saving more or working longer to ensure you can withstand those potential cuts, Elsasser said.