With a few months of inflation data yet to be looked at, it looks like those who cash in on Social Security have a significant increase in store in 2022. The most recent Consumer Price Index (CPI) announcement for the month of June revealed an annual increase of 5.4% and the Senior Citizens League estimates the final number announced in October could be closer to 6.1%. This would be the largest upward adjustment in benefits since 1983.
This is welcome news, of course, especially for retirees who rely heavily on Social Security and who may be struggling with the increased costs of groceries, gas and health care, among other goods and services. The Social Security Administration reports that 20% of married couples and 40% of singles receive at least 90% of their income from Social Security alone, so this is an important announcement for many.
There could be an even bigger upward adjustment if a recently tabled bill is passed, changing the way cost of living (COLA) adjustments are calculated. The bill, called the “Fair COLA for Seniors Act of 2021,” would take into account that the rise in inflation for the elderly is actually higher than the current calculation of inflation for wage earners. This bill would look specifically at areas where seniors spend a larger portion of their income, such as health care.
How does this translate into actual dollars if the increase is 6.1%? For those lucky enough to receive the maximum benefit of $3,895, that would mean an additional $237.60 per month, or $2,851.14 per year. However, for the average American raising $1,543, the increase would be just under $100 per month.
The news isn’t all good as unfortunately the new benefits won’t be reflected in monthly payouts until January 2022. That means retirees will have to endure the increased cost of living for several more months without the increase in income. From a financial planning standpoint, now may be a good time to maintain a larger cash buffer for investments or other income-generating vehicles you may have. It’s also important to remember that while this may seem like a pay rise to many, it doesn’t increase the true value of your Social Security income. That’s because in theory, if the adjustments are calculated correctly, you’ll be spending the extra money on the same goods and services anyway. It ends up being a wash when you do the math.
While the government can protect your Social Security income from inflation, you can use a similar theory when protecting your investments. Investing in commodities has traditionally been a great way to participate in rising prices for everything from natural gas, wood, beef to orange juice. Precious metals such as gold have historically performed well as a hedge against inflation, especially as part of a diversified portfolio. Treasury Inflation Protected Securities (TIPS) were created by the US government to explicitly protect investors from inflation and provide a guaranteed way to participate in rising prices. Other investments to consider are real estate and just stocks in general.
When it comes to retirement income planning, Social Security is an important income stream for millions of Americans. In a few months we will find out how much increase we can expect next year. Keep in mind that the extra income you may receive doesn’t necessarily mean you’ll have extra money to spend on other things, so plan accordingly.