There's a reason seniors on Social Security are entitled to annual cost-of-living adjustments, or COLAs. Without those raises, their buying power would erode to an extreme degree in the course of retirement due to inflation.
The problem with COLAs, though, is that they've historically done a poor job of helping seniors stay afloat financially in light of inflation. This holds true even when COLAs are fairly generous.
Such is the case this year. Seniors on Social Security were privy to a 5.9% COLA for 2022 -- the most generous raise the program had dished out in decades. In spite of that, they're already losing buying power in a very big way.
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Even a larger COLA can't keep up
Many seniors were happy to learn that their benefits would be rising by 5.9% in 2022. But so far, that raise is falling short.
In January, the Consumer Price Index was up 7.5% on an annual basis. And while we don't have February's data yet, we can expect to see a comparable level of inflation one those numbers come in.
As such, the 5.9% raise seniors got to kick off the year just isn't cutting it. And so many retirees are no doubt struggling financially these days in the face of rising living costs -- particularly those who get most or, worse yet, all of their income from Social Security.
Avoiding a financial crunch
Social Security clearly has its limits when it comes to sustaining seniors during retirement. And so if you want to avoid a world of financial worries in retirement, the solution could boil down to amassing savings of your own so you're not overly reliant on those benefits.
In fact, Social Security will only replace about 40% of your pre-retirement wages if you're an average earner -- and that assumes universal benefit cuts aren't implemented. If that happens, those benefits will give you even less buying power.
That's why it's crucial to work on building a nest egg. That's something it's too late for current retirees to do, but if you're still working, you have a solid opportunity to amass a nice amount of retirement wealth.
If you contribute $300 a month to an IRA or 401(k) plan over the next 30 years, and your invested savings generate an average annual 8% return (which is a bit below the stock market's average), you'll end up with roughly $408,000 to your name. Make it $500 a month, and you'll be sitting on around $680,000 instead.
Having that level of savings available during retirement could help compensate for Social Security raises that fail to keep up with inflation. And building a nest egg could also give you more financial flexibility during retirement -- even during periods when living costs aren't soaring.
Take action while you can
While Social Security may end up being an important income source for you during retirement, you can't afford to rely too heavily on those benefits. Even when they get a nice boost, they often end up failing seniors. And so your best bet is to take savings matters into your own hands while you can.
