The good news is that inflation is dropping, with the average annual cost of living falling from 4.9% in April to 4% in May, according to the latest data from the U.S. Department of Labor. The bad news is that it also means the expected annual cost-of-living adjustment (COLA) for Social Security recipients also is falling, dropping to what the Senior Citizens League now estimates will be 2.7%.
If you’re looking to make your retirement plan sustainable, a financial advisor can work with you to plan ahead.
Inflation and Your Social Security COLA
As the official inflation rate has declined from a jaw-dropping 8.6% in May 2022 to 6.4% in January to May’s 4%, so have estimates for Social Security’s cost of living increase. In April, Social Security Administration officials estimated the increase would be 3.3% for 2024, while the Senior Citizens League pegged it at 3.1% in May before lowering the estimate to 2.7% now.
Whether that means retirees will get an increase that fully keeps up with their purchasing power won’t be known until well into next year because of the way the increase is calculated. The 2022 Social Security adjustment of 8.7% was well over the final annual inflation rate of 6.5%.
“That difference theoretically should provide a modest temporary improvement in buying power of roughly $52 per month for a retiree with average benefits of $1,694,” according to a release from the League.
But that comes after years where the adjustment failed to keep pace with price increases, the league’s statement noted.
“Inflation, however, was so severe in 2021 and 2022 that the average Social Security benefit fell behind by $1,054, leaving 53 percent of retirees doubting they will recover because household costs rose more than the dollar amount of their COLAs.”
Why Seniors Should Be Mindful of Food and Housing
The big disconnect comes from the fact that the cost of living adjustment is based on what happened for just part of the year before, while people depending on Social Security benefits live with the reality of inflation happening to them each month.
The Social Security benefit is adjusted in the third quarter of the year, well before officials will see the results for the last three months of the year.
On top of that, the adjustment is made based on different figures than the ones the Labor Department uses in calculating the official inflation rate.
The Social Security Administration bases its figure on the change between the third quarter of the current and the previous year’s Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The Labor Department uses the similar but broader Consumer Price Index for All Urban Consumers.
As for how prices are hitting retirees, the Senior Citizens League reports that older consumers are reporting little improvement in their household spending so far this year.
The League found that 62% of survey participants reported food costs remained their fastest-growing cost, while housing cost was the biggest concern of 22% of those surveyed.
Bottom Line
The Federal Reserve hiked interest rates 10 times over 15 months with the aim of bringing inflation down, and it appears to be working. But prices of some individual items remain stubbornly high. The higher interest rates increase borrowing costs, such as credit card charges, car payments and mortgages, and are designed to push consumers and businesses to reduce spending. However, seniors need to keep a close eye rising costs, specifically food and housing, to make sure that they remain sustainable.
Tips for Retirement Planning
- Finding a financial advisor who can help with your retirement plans doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals,
get started now. - The biggest unpredictable factor that plays into projecting retirement income needs is inflation. Over the course of a 30-year retirement, even modest inflation can steadily erode the purchasing power and standard of living of retirees. SmartAsset’s free inflation calculator can help you estimate your purchasing power over time.
