The Social Security Administration announced a cost-of-living adjustment of 2% for 2018. But is that enough to outpace rising costs in retirement?
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%, up from the 2017 COLA of 0.3%. The government estimates the average monthly Social Security benefits payable in January 2018 will jump to $1,404 from $1,377.
The 2% increase will begin with benefits payable this month to more than 61 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.
Other Social Security changes for 2018 include:
“Most seniors would say the Social Security COLA is not keeping up with their cost-of-living increases,” according to David Certner of the AARP Legislative Counsel. The Social Security COLA is based on a basket of goods and services for the average American, but, in general, seniors spend proportionately more on medical care, which has been rising faster than the overall CPI inflation rate.
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.
For those who have investment savings in retirement, while adding more risk than simple savings, remember that investing some percentage of that in the stock market can help mitigate inflation risk too. A diversified portfolio may often 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.
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 or renting out extra rooms in their homes, or other part-time job. Some analysts say, 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 offering 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, and the impetus for saving 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.
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