Many seniors struggled to keep up with their living costs in 2022 due to rampant inflation. Since the start of the year, consumers have been forced to spend more on everything from housing to transportation to groceries. And for those largely limited to a monthly check from Social Security, it's been a real strain.
Of course, the good news about rampant inflation is that it's fueling Social Security's largest cost-of-living adjustment (COLA) in decades. In 2023, Social Security benefits will rise by 8.7%. That's a major increase, compared to 2022's COLA of 5.9%.
All told, the average monthly Social Security benefit right now is $1,681. But once next-year's COLA takes effect, that average benefit is expected to rise to $1,827.
Just as importantly, the cost of Medicare Part B isn't rising for the first time in years. In fact, it's going down. So seniors who are enrolled in Medicare and Social Security should get to keep that raise in full.
A monthly benefit of $1,827 might seem generous at first glance. And it's certainly a nice bump for seniors to look forward to.
But the reality is that seniors on Social Security might struggle even once their upcoming COLA takes effect. And that's why it's so important to have income outside of those benefits.
Don't rely on Social Security alone
Although Social Security benefits are getting a nice lift in 2023, that raise was fueled by inflation. So it's unclear as to whether seniors' buying power will actually increase or not.
But let's be optimistic and assume that inflation levels do decline in the new year. Social Security recipients might, in that case, gain a modest amount of buying power. But that doesn't automatically mean they'll be rolling in money or even managing to live comfortably.
A monthly benefit of $1,827 still amounts to an annual income of roughly $22,000. That's not a very large number. And seniors who get most or all of their income from Social Security might continue to struggle financially in 2023, even with a major boost coming down the pike.
Of course, it may be too late for current retirees to bump up their cash reserves. But today's workers can take steps to avoid becoming overly reliant on Social Security down the line -- namely, by setting money aside in an IRA or 401(k).
It doesn't take a whole lot of money on a monthly basis to build a large nest egg over time. Contributing $300 a month to one of these savings plans over 35 years will result in a nest egg worth $620,000, assuming that money is invested at an average annual 8% return, which is a bit below the stock market's average.
Next-year's average Social Security benefit may be larger than many would expect. But living on Social Security alone still isn't a great idea. The sooner more people recognize that, the sooner they can take steps to avoid a financial crunch during their later years.