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NerdWallet

Aug. 16, 2022, 5:02 a.m. EDT

3 ways to protect your finances and future retirement from inflation

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By Liz Weston

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Delay Social Security

One of the best inflation hedges that retirees can have is a maxed-out Social Security benefit, says William Reichenstein, head of research for Social Security Solutions, a claiming strategy website. Social Security benefits are adjusted annually for inflation, so the larger someone’s benefit, the more money they get from each annual cost-of-living adjustment.

The Social Security Administration increased this year’s benefits by 5.9%. The Senior Citizens League, an advocacy group for older Americans, forecasted an 8.6% increase in benefits next year.

People can start Social Security as early as age 62, but their benefits are permanently reduced if they apply before their full retirement age, which is currently 66 to 67. After full retirement age, people who delay their applications get an  annual 8% boost  in their benefit, known as a delayed retirement credit. Benefits max out at age 70.

Your benefit gets cost-of-living increases whether you’ve started receiving it or not, so you’re not missing out on inflation adjustments when you delay your application, Reichenstein says.

Most people who make it to retirement age will live past the “break even” point where the larger benefit they get from delaying exceeds the smaller checks they pass up in the meantime, Reichenstein says. It’s particularly important for the higher earner in a married couple to delay as long as possible. The larger of a couple’s two benefits is what the survivor will get after the first spouse dies.

Also, delaying Social Security benefits could help middle-income people reduce their overall tax burden and leave them with more after-tax money to spend, Reichenstein adds.

See : How does retiring early impact Social Security benefits?

The way Social Security benefits are taxed creates a “tax torpedo” — a sharp rise and then drop in the marginal tax rates many retirees pay on their income. (A marginal tax rate is the amount of additional tax paid for every additional dollar of income.) Delaying Social Security and tapping retirement funds instead can reduce the effects of this torpedo for middle-income people who might otherwise see their marginal tax rates double, Reichenstein says.

“Goods and services are purchased with after-tax dollars, not pretax dollars, so that’s another reason to consider delaying a Social Security benefit,” he says.

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Liz Weston, CFP® writes for NerdWallet. Email: lweston@nerdwallet.com. Twitter: @lizweston.

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