If you're a retiree receiving Social Security, news of the largest benefits increase in decades may have you feeling optimistic about the future.
Unfortunately, while it's true seniors will get a 5.9% Social Security benefits increase in 2022, the sad reality is this raise is likely to fall far short of what they need to maintain their standard of living.
In fact, instead of ending up flush with cash due to a bigger monthly check, many seniors could find 2022 is a rough financial year. Here's why.
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This is the big problem seniors are facing
The Consumer Price Index, which measures changes to the costs of goods and services over time, showed prices were around 7% higher in December 2021 compared with costs during the same time the prior year. Comparing the CPI numbers is one of the most accurate measures of inflation, since the price index measures the cost of dozens of items across multiple purchase categories. This rapid rise in prices revealed inflation occurred at the fastest 12-month pace in four decades. A comparison of year-over-year costs also revealed that prices are rising in some key categories affecting seniors, including shelter costs, fuel oil, and food.
Retirees who are hit with 7% inflation but who get a 5.9% raise will face a financial shortfall if they're counting on Social Security benefits to actually keep pace with rising prices. This could leave retirees forced to rely more on savings.
Unfortunately, inflation isn't good for savers either, as it erodes the buying power of invested funds -- unless they earn returns that substantially exceed the inflation rate.
What can retirees do to cope with a tough year?
The fact is, the Cost of Living formula that resulted in a 5.9% raise has failed retirees due to the fact inflation surged so much in recent months after the COLA calculation was completed. And there's nothing individual retirees can do to change either the inflation rate or the Social Security raise they received. That means the only way to cope with rising prices is to make modifications to their financial lives.
One of the most important things seniors can do is ensure they have the right investment mix. It's appropriate to move to a more conservative investment portfolio as a retiree because you have less chance to wait out market downturns. But a portfolio that's too conservative is likely to earn such low returns that seniors will see the buying power of their nest egg plummet during times of record inflation.
Retirees need to make absolutely certain they have the appropriate asset allocation and aren't underexposed to equities. While every senior should consider their own risk profile, one good rule of thumb is to subtract your age from 110 and invest that amount in stocks.
Retirees may be able to reduce the risk of equities exposure by opting for exchange-traded funds that track financial indexes, rather than choosing individual stocks to buy. An ETF that tracks the S&P 500 should have very low investing fees and, based on historical data, should perform well for seniors over the long term.
Seniors also need to make adjustments to their budgets, which could include tightening their belts when possible and avoiding large nonessential purchases such as buying a vehicle right now.
By living on a careful budget, exploring ways to save such as using coupons, and making absolutely certain they have the right investing mix, hopefully seniors can cope with the bad news of surging inflation and a Social Security raise that doesn't keep pace with their added costs.
