Counting on Social Security benefits to fund your retirement? You’re not alone. Nearly 90% of retirees receive Social Security benefits and many of them count on those benefits for more than half of their retirement income.1
Social Security benefits don’t go as far as they used to, though. In fact, benefits have lost nearly 30% of their purchasing power over the past 20 years. This is due to inflation. Living expenses for retirees have increased 99.3% since 2000.2
Social Security provides inflation protection in the form of a cost-of-living adjustment, also known as COLA. However, COLAs have increased benefits by only 53% over the past two decades.2
That means living expenses have significantly outpaced Social Security benefits. The Senior Citizens League has found that a senior who had a benefit of $816 per month in 2000 would need $1,626 per month in 2020 to cover the same expenses.2
Why does this happen? COLA is based on something called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks inflation. The problem is that many retirees are not urban wage earners or clerical workers, and thus spend their money differently than the typical worker.3
Seniors tend to spend a disproportionate amount of their income on food, housing, and healthcare. These categories are underweighted in the CPI-W, so inflation in those areas is not counted as heavily as it should be. This leads to a low COLA.4
You can’t control Social Security COLA, but there are steps you can take to protect your purchasing power and combat inflation. Here are two strategies to consider:
Rely on other sources to cover healthcare costs.
Healthcare is one of the biggest drivers of inflation for retirees. In the past 20 years, Medicare Part B premiums have jumped 218%. Out-of-pocket prescription drug costs for retirees have increased 252%. Social Security benefits increased only 53% over the same period.3
If the past 20 years are any indication, you can’t count on Social Security adjustments to offset increases in healthcare spending. You may want to consider using alternate strategies, like funding an health savings account (HSA) that you can use in retirement to fund out-of-pocket costs.
You also may want to explore various Medicare Advantage policies. These are Medicare policies offered through private insurers. They often cover the same services as traditional Medicare, plus enhanced services. They also may reduce your out-of-pocket costs. A financial professional can help you determine which policy is right for you.
Continue to grow your assets
You may be tempted to become more conservative in retirement. After all, you don’t want to lose what you worked so hard to accumulate over several decades. Adjusting to a more conservative allocation may be the right move for your needs and risk tolerance. However, it’s also important to continue to grow your assets.
Growth can help you increase your income over time and keep up with inflation. You can give yourself a personal COLA with increased distributions from your retirement accounts. There are a wide range of strategies you can use to potentially grow your assets but also minimize your exposure to risk. Again, a financial professional can help you implement the right strategy for you.
Ready to develop your retirement income plan? Let’s talk about it. Contact us today at Beacon Retirement Planning Group. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.
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