Slightly lower inflation might be good news for the general economy, but it will mean retirees see a smaller bump in their Social Security checks next year.
The average monthly Social Security check is expected to rise by 3.2%, or $59, bringing the total to $1,906 next year, the Social Security Administration confirmed. That is far lower than the
Mary Johnson, the Social Security and Medicare policy analyst at the Alexandria, Virginia-based Senior Citizens League, noted that the 3.2% expected for next year is still above the historical average of 2.6% for annual COLAs. But that doesn't mean retirees can expect to be flush with money in 2024, she said.
Johnson said inflation may have slowed this year, but prices for many consumer goods and necessities remain elevated.
"That includes things like housing costs and medical premiums and out-of-pocket spending," she said. "That is where the squeeze comes in for people who are retired. And that's why it's important to have good financial planning."
Eric Nelson, the president of Independence Wealth in Vorhees, New Jersey, said the need to keep up with rising prices shows why it's important for savers to invest in equities and other assets that have historically shown returns that outpace inflation. Even for clients who are expecting to receive a pension on retirement, he advises they put money into a retirement plan like an individual retirement account to take advantage of market growth.
Savers this year can put as much as $6,500 in a traditional IRA and watch it grow tax free following its investment in stocks and bonds. For anyone over 50, the 2023 contribution limit is $7,500.
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Nelson said owning a home is another good hedge against rising prices.
"That allows you to reduce your exposure to inflation because there is no increase in rent, because your mortgage is your mortgage," he said. "The only increase with that would be increases in property taxes."
Rob Hovis, the founder of Millersburg Financial Services, an LPL-affiliated firm in Millersburg, Ohio, said he thinks workers who are nearing the age of retirement should meet with a financial advisor to review their 401(k) and other retirement accounts. Too often, Hovis said, clients will have their money invested in target-date funds — which aim to provide an investor with enough money to retire by a certain year — that he thinks are too conservative.
"They aren't getting the rate of growth they need to deal with inflation if that happens in their retirement," Hovis said. "They need to be a little more aggressive in terms of growth funds."
Hovis also said he advises clients who are feeling the pinch of rising prices to first take money out of taxable investment accounts. Tax-sheltered accounts like 401(k)s and annuities should be viewed as a last resort since their owners can't take money out without owing taxes.
Social Security checks go out every month to
The Social Security Administration calculates how much Social Security checks should increase every year by looking at inflation data for the months of July, August and September. It usually announces the official number in mid-October.
Last year's average COLA of 8.7%
The inflationary gauge used for calculating the COLA is the U.S. Labor Department's Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. With federal officials still trying to tame inflation, there's a chance that rising prices will outstrip next year's COLA.
Johnson noted that retirees who are enrolled in
But Johnson doesn't think that figure takes into account a recent decision to have Medicare pay for a slew of drugs used to treat Alzheimer's. She has forecast the increase in Part B premiums will be closer to $15 a month.
For retirees who receive the average monthly COLA of $58 next year, such an increase in their Medicare B premiums should come as no huge blow. But some retirees at the lower end of the COLA scale could see their entire inflationary adjustment swallowed up.
The current Medicare Part B monthly premium is $169.40; the rate for 2024 won't be announced until November.
"Some people might see very little of that COLA," Johnson said.
Social Security benefits are calculated using a complex formula that primarily takes into account how much money retirees earned during their working years. Another important factor is their age of retirement. Those who choose to retire early at age 62, for instance, will receive less than those who wait until their "full retirement age," which is typically between 66 and 67 years old.
Nelson said the benefits of delaying the collection of Social Security are substantial. A person who goes from 62 to 70 without collecting a single check will see a 76% boost in their monthly payments.
For those who are able to work past their full retirement age, or who can live off their savings until they start collecting Social Security at age 70, the advantages of postponement are well worth considering, Nelson said.
"So if you are a married couple, you are going to be able to leave a larger survivor benefit," Nelson said. "It also reduces your shortfall every month because you are effectively granting yourself an increase in your income."
