Social Security is crucial to most people’s retirements. It comprises over 90% of income for one-quarter of Americans over sixty-five.
How your benefits are calculated matters. It matters a lot. This year, the Cost of Living Adjustment (COLA) to Social Security benefits was 0.3%. This is roughly $5 more per month than for the average recipient.
This wouldn’t really be an issue if the inflation rate that retirees faced was also this low – this adjustment is only meant to maintain the purchasing power of benefits.
But that’s not the case.
Retirees spend a much larger portion of their income on health care than the average American, and health care costs go up much faster than inflation, so the COLA won’t help you there.
The problem is that the inflation rate used by the Social Security Administration to calculate these adjustments is based on “Urban Wage Earners and Clerical Workers.” In other words, pre-retirees. As you can imagine, pre-retirees have different consumption patterns than retirees, and this can put pressure on the benefits received by Social Security recipients (as it did this year).
That’s why it’s so important that you make sure that your retirement income strategy is locked down. You want to know how you will pay for what you want to do in retirement. Social Security will probably play an important role in this, but it shouldn’t be your whole plan.
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