Understanding Social Security COLA Adjustments
Inflation is a reality that drives prices up over time—a fact most people are aware of. To help counter this, Social Security benefits receive an annual cost of living adjustment (COLA).
In earlier times, lawmakers needed to vote on these COLA changes. However, that’s shifted, and now adjustments occur automatically based on the consumer price index for urban wage earners and office workers.
Yet, there’s a catch. While these COLAs are meant to keep pace with inflation, they frequently don’t quite catch up. A significant factor in this discrepancy is that healthcare costs often escalate faster than the overall rate of inflation. For many Social Security recipients, a large portion of their income goes toward medical expenses.
Take this year, for instance: Standard monthly Part B Medicare premiums surged nearly 9.7%, climbing from $185 to about $202.90. In contrast, the COLA for Social Security benefits was only 2.8%.
This situation might sound alarming, but it doesn’t spell disaster for beneficiaries. Here are some suggestions if you’re feeling anxious about what comes next.
Delay Claiming Benefits
After reaching your full retirement age—67 if you were born after 1960—you can claim your Social Security benefits without penalty. However, if you delay your claim until age 70, your monthly benefits will increase by 8% for each year you wait. This isn’t just about getting a larger monthly check. Delaying also offers added protection against inflation. A bigger benefit means more money in your pocket when COLAs are issued.
Keep in mind, when Medicare Part B costs rise, that increase applies to everyone. But if you start with a higher benefit, you could end up with a larger net adjustment during times of significant Part B increases.
Invest in Assets That Outperform Inflation
It’s not wise to rely solely on Social Security to manage rising medical expenses. Consider enhancing your monthly income by drawing from your investment portfolio as well. If you mix stocks and bonds in your portfolio, your money can grow over time—stocks generally appreciate, while bonds provide dependable income.
Planning for your retirement portfolio should ideally begin early in your career. Waiting until a few years into retirement to save can be risky. Consistently contributing to your IRA or 401(k) over the years can lead to substantial growth, turning small monthly contributions into significant amounts.
You may not have control over healthcare costs, but that doesn’t mean you’re bound to fall behind. The strategy lies in thoughtfully claiming Social Security and balancing it with savings and investments to maintain your purchasing power.
