If you are a retiree already receiving Social Security benefits, or if you’re planning to retire soon, understanding Cost-of-Living Adjustments (COLAs) is crucial. These adjustments are designed to help you keep up with the rising costs of living. But how exactly do they work, and what impact do they have on your monthly payments?
Here are 6 important things every retiree should know about Social Security COLAs:
1. COLAs Reflect Inflation
Social Security COLAs are directly tied to the inflation rate. They are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is calculated by the Department of Labor. The COLA increase for 2025 will be 2.5%, which means an average Social Security payment will rise by about $50 per month. This increase is meant to help seniors cope with inflation over the previous year.
2. Not Everyone Gets the Same Increase
While the average Social Security payment is expected to increase by $50 with the 2.5% COLA, the actual increase will depend on how much you are already receiving. Retirees with higher Social Security benefits will see a larger absolute increase, while those with smaller benefits will receive a smaller dollar amount in absolute terms. However, everyone will get the same percentage increase — 2.5%.
3. COLAs Are Announced in October
Every year, the Social Security Administration announces the COLA increase in October. This announcement reflects the inflation rate from the previous 12-month period, ending in September. So, for the 2025 increase, it was based on price changes from September 2023 to September 2024.
4. COLAs Don’t Start Until January
Although COLAs are announced in October, they don’t take effect immediately. The new COLA adjustment is added to payments starting in January of the following year. So, if you are a retiree, your January 2025 payment will reflect the 2.5% increase announced in October 2024.
5. You Don’t Need to Do Anything to Get the COLA
Good news for retirees: you don’t have to fill out any forms or take any extra steps to receive the COLA. The Social Security Administration automatically adjusts your monthly payment based on the new COLA, and you will either see a larger direct deposit or receive a larger check in the mail.
6. COLAs May Not Be Enough
While COLAs are intended to keep pace with inflation, many seniors feel that the adjustments don’t fully cover the rising costs of living, especially healthcare. According to The Senior Citizens League, retirees have lost around $370 per month in buying power since 2010 due to inadequate COLAs. The current inflation measure, CPI-W, may not accurately reflect the specific costs seniors face, especially healthcare costs, which tend to rise faster than general prices.
What Can Retirees Do About It?
While it may take years for major changes to the COLA formula, there are steps retirees can take to offset the effects of inflation today. Consider moving cash from low-interest savings accounts to money market funds, which currently offer around 5% annualized returns. Additionally, if you own dividend-paying stocks, ensure that those companies are increasing dividends at least as fast as inflation. If not, consider selling and investing in companies that regularly raise dividends.
By staying proactive, you can better protect your retirement savings from the impacts of inflation.
(Source: msn.com)
