The 2022 year is shaping up to be a very rough one for Social Security retirees. In fact, seniors are facing a challenge this year unlike anything they've seen over the past four decades.
Why are older Americans in for such a tough time this year? There's one overarching reason.
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This financial issue will have a huge impact on seniors
The big financial challenge seniors are facing this year is one that most people have already started feeling the effects of -- record high inflation.
According to recent economic reports, inflation hit 7.5% in January 2022. This means prices on goods and services are up that much year over year. It also means that inflation is at its highest level since 1982. These big cost increases are largely driven by a bump in the cost of groceries, energy, housing, and healthcare -- all of which seniors typically have no choice but to spend money on.
Unfortunately, while inflation affects everyone, seniors are often especially damaged by rising prices for a few key reasons:
- Social Security benefits haven't been very good at keeping up with inflation. While Cost of Living Adjustments are built into the benefits program, they've been falling short at helping seniors maintain buying power for decades. The formula used to calculate them is an imperfect one, and raises are calculated based on pricing data from the third quarter of the year before the raise takes effect. While this data showed a 5.9% increase in costs and resulted in a raise equaling that amount for 2022, inflation has continued surging since then.
- The value of savings falls during times of high inflation. Savings is typically the other key source of income seniors have, along with Social Security. Sadly, savers are hit especially hard by inflation because the buying power of their invested funds falls. Since many retirees are invested conservatively -- and rightly so since they can't afford to take on huge risks with money they're relying on -- they'll typically see the real value of their investment accounts fall even more than younger investors who may be able to earn higher returns later to offset some of inflation's effects.
Since Social Security benefits won't buy as much, and neither will distributions from retirement accounts, seniors are left forced to choose between drastic budget cuts or potentially withdrawing too much from their investment portfolio too soon.
How can seniors cope?
Coping with the effects of rising inflation can be difficult for everyone, but for retirees on a limited income, it can be especially tough.
The best option is to look carefully at your budget and see what purchases can be put off and where reductions can be made. This may mean giving up some discretionary spending. Retirees can also consider securing a part-time job to help bring in extra income, which may be easier than usual in a tight labor market with high demand for skilled workers.
Ultimately, the tough financial situation seniors on Social Security are facing right now will undoubtedly require some sacrifice. But by being aware that prices are rising and the value of retirement benefits is declining, retirees can act swiftly to make the types of modifications needed to avoid long-term damage to their financial situation.
