Unless you've been under a rock this year, you know just how real inflation has been. From gas to groceries to everything in between, increased prices have been draining people's wallets. In July 2021, the U.S. personal savings rate was 10.5%. At the end of June 2022 (the last available data as of Aug. 14), the savings rate was down to 5.1%.

Inflation is affecting everyone, but it's hitting people on fixed income, like Social Security, the hardest. There is one source of relief from this historically high inflation for these individuals: Retirement benefits could see a big jump in monthly payments next year.

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How inflation affects Social Security

Each year since 1975, Social Security benefits have been adjusted for inflation. It's hard to tell someone to survive off the same monthly amount today that they received 10 to 15 years ago. The cost-of-living-adjustment (COLA) is based on the previous year's third-quarter consumer price index numbers.

Considering the recent year-over-year inflation numbers -- 8.5% (July), 9.1% (June), and 8.6% (May) -- it's expected that when Social Security announces the COLA for 2023, it will be at least 8%. And that's on the conservative end. For perspective, here are the Social Security COLA adjustments for the past 10 years:

2021 5.9%
2020 1.3%
2019 1.6%
2018 2.8%
2017 2%
2016 0.3%
2015 0%
2014 1.7%
2013 1.5%
2012 1.7%

Data source: Social Security Administration.

As of June, the average Social Security benefit was $1,669. An 8% increase would put it over $1,802. This will undoubtedly help, but even with the increase, it might not be enough for many people.

You'll likely need other sources of income

One way that people can determine how much they'll need annually in retirement is by using the 80% rule. The goal is to have at least 80% of your annual income in retirement to maintain your current lifestyle. For example, here are the ideal yearly amounts based on current annual earnings:

Annual Salary Annual Goal in Retirement
$50,000 $40,000
$80,000 $64,000
$100,000 $80,000
$200,000 $160,000

Data source: author calculations.

At $1,802 monthly, that's just over $21,600 per year in Social Security. If we're applying the 80% rule, $21,600 would only be ideal for someone currently making $27,000. If you make more than that, you shouldn't rely solely on Social Security, even with the COLA.

The 80% rule is more of a baseline than an absolute goal, so adjust it according to your lifestyle. If you plan to downgrade, you can aim for less, and vice versa. However you adjust it, there's a very good chance that $21,600 won't be enough to carry the financial load. It's going to take some extra savings.

Retirement accounts are designed to incentivize you to save and invest for the years after you stop working. It's always better to be overprepared than underprepared, and using accounts like a 401(k) and an IRA are two of the best ways to do so. You get tax breaks that could save you money on the front end, and you reap the benefits of additional retirement income on the back end.