Entering Social Security Estimates

[mountainsoft]

What would you recommend for tax and COLA when entering SS payments on the Additional Inputs screen?

Historical COLA adjustments for Social Security seem to be all over the place, including years with no COLA's.

I assume I would enter 50% for the taxable amount based on a total income under 42,000?

Thanks,

Anthony

[jimr]

I'm not really sure about how social security currently gets taxed, so I can't really help with that. It sounds like you're on the right track though.

For the COLA, you have to decide if you believe that your social security payments will generally keep up with inflation overall. Since COLA payouts are indexed to the CPI, it would seem reasonable to just say that those payments 'track inflation'.

OTOH, some people believe that the CPI understates inflation. If you believe this is true and want to adjust for this, you could use a COLA for ss payments that's lower than the inflation rate.

I would caution that these adjustments can be complicated to get right and are definitely something for more advanced users who know how to 'check their work' by carefully reviewing the year-by-year outputs in the detailed view to make sure the simulation is doing what you intended.

[mountainsoft]

I would caution that these adjustments can be complicated to get right and are definitely something for more advanced users who know how to 'check their work' by carefully reviewing the year-by-year outputs in the detailed view to make sure the simulation is doing what you intended.

If I estimate inflation at 3%, and say a fixed 1% COLA for social security (or whatever average I calculate), wouldn't that be erring on the side of caution if SS COLA adjustments are actually higher?

By the way, thanks for your prompt responses to all my questions and for a great program!

Anthony

[jimr]

That does sound like a conservative way to model the ss income.

Another approach is to make the adjustments on the spending. To do this, you'd use a fixed COLA for spending that's higher than inflation. I've seen users break out their medical expenses separately and model those with a COLA that's much higher than inflation, while having the rest of their expenses track inflation.

As you can see, there's no one right way to model a retirement plan. Most retirement plans have many moving parts and multiple ways to represent each input. The key is to think everything through carefully and check and recheck your work to be sure the simulation is doing what you expect.