The Social Security Administration announced a cost-of-living adjustment of 2.8% for 2019. But is that enough to outpace rising costs in retirement?
Learn why a 2.8% increase might be inadequate for many seniors
If you’re on Social Security, you’re getting a bigger cost-of-living adjustment than last year. But that’s a bit of a double-edged sword, because it means you’re paying more for goods and services in general.
Each year, the government uses Consumer Price Index data to calculate whether there will be a cost-of-living adjustment, or COLA—not to be confused with a soft drink—and, if so, how much it will be.
This year, the change in Social Security benefits is an increase of 2.8%, up from the 2018 COLA of 2%. The 2.8% increase will begin with benefits payable to more than 67 million Social Security beneficiaries, according to the Social Security Administration (SSA). Of course, the increase comes because prices for goods and services are also on the rise.
Sources:Social Security Administration; Dept. of Health and Human Services
Other Social Security changes for 2019 include:
Many seniors might be concerned that the Social Security COLA for 2019 does not keep up with their cost-of-living increases. The COLA is based on a basket of goods and services for the average American, but, in general, seniors have different spending needs than younger folks, Jo Ann Jenkins, CEO of AARP, pointed out. “Unfortunately, the cost of living increase may not adequately cover their expenses that rise faster than inflation including health, prescription drug, utility and housing costs,” she said in a blog post just after the 2019 COLA was announced.
Christine Russell, senior manager of retirement and annuities at TD Ameritrade, agrees. She says a COLA shortfall is particularly acute for seniors who use prescription drugs. "The cost of medication has risen significantly over the last 10 years," she says. Russell points to a recent Congressional report that said, over the past five years, the 20 most commonly prescribed brand-name drugs for seniors have risen about 10 times the inflation rate. According to Russell, “Medicare is not permitted to directly negotiate drug prices which accounts for much of the cost increases.”
“For many seniors, higher drug costs can easily surpass the COLA,” Russell says.
In other words, inflation can be in the eye of the beholder, and it’s up to each person—retirees as well as those saving for retirement—to assess their personal situation and decide to what degree Social Security payments might reflect their wants and needs in retirement.
Retirees who have investment savings may see more risk than simple savings. But remember that investing some percentage of savings in the stock market can potentially help mitigate inflation risk. A diversified portfolio may rise faster than inflation over time. Of course, take your time horizon (which may still be 30 years in retirement!) and risk tolerance into consideration when creating your diversified portfolio. And keep in mind that all investing involves risk including the possible loss of principal.
If you feel, based on trends and expectations, that you want to rely less on Social Security payments in retirement, you might consider saving more ahead of time if possible, or finding other sources of income once in retirement.
For example, many seniors are joining the “gig economy” by driving for a ride-sharing service, renting out extra rooms in their homes, or finding other part-time jobs. Some analysts say that as the job market continues to improve, now is a great time for retirees to re-enter the workforce.
If that doesn’t work for your situation, you might consider purchasing an annuity or other investment that offers a constant payment stream. You can even purchase a guaranteed income benefit that will provide you a COLA each year and/or provide spousal benefits should a spouse die.
And if you’re currently saving for retirement, perhaps this can be a reminder of the importance of planning ahead. Save as much as you can; every little bit helps. You might even consider a delay in collecting Social Security beyond your full retirement age. Doing so can make you eligible for an additional credit of between 3% and 8%, depending on your birth year.
Need help designing a retirement income strategy? Visit the TD Ameritrade Retirement Income Solutions page.
Matt Whittaker is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
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