Many seniors today rely heavily on the monthly benefit they get from Social Security. For some, in fact, it's their only source of income.
Meanwhile, this year, Social Security benefits are getting a 3.2% cost-of-living adjustment (COLA). While that's more generous than some recent COLAs, it's a much smaller boost than the whopping 8.7% COLA Social Security beneficiaries received last year.
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The whole purpose of COLAs is to help Social Security recipients maintain their buying power as inflation drives the cost of living upward. A smaller COLA in 2024 compared to 2023 indicates that inflation receded in the previous 12 months.
But very recent inflation data points to an uptick in living costs. And if that trend continues in 2024, seniors on Social Security could really lose out.
Inflation is already up
In December, inflation, as measured by the Consumer Price Index (CPI), rose 3.4% on an annual basis. On a monthly basis, it increased 0.3%. Some notable 2023 increases included a 1.3% rise in the cost of groceries, and a 3.3% increase in electricity costs. Rising shelter costs were also a big driver of the uptick.
Meanwhile, Social Security COLAs are calculated based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a subset of the CPI. The CPI-W was up 3.3% in December on an annual basis.
But whether we look at the broader CPI or the CPI-W, we can already see increases in inflation that are higher than 3.2%. If inflation continues to tick upward in 2024, it could put seniors on Social Security in a really tough spot, financially speaking.
It's important to have income outside of Social Security
Social Security COLAs often fail to help seniors maintain their buying power adequately as living expenses rise. That's why it's so important to have retirement income outside of Social Security.
For current retirees, that additional income could come in the form of gig work. For those still in the midst of their careers, focusing on savings could be the key to avoiding a financial crunch later in life.
Of course, given the rise in living costs that people have been grappling with over the past couple of years, funding a retirement plan may be easier said than done. But even so, socking away $250 a month over a 30-year period could result in a nest egg worth about $340,000, assuming a portfolio that's invested at an average annual 8% return. That return is a bit below the stock market's average, so it's a reasonable projection for a 30-year savings window.
It's too soon to know what's in store for inflation in 2024. But so far, Social Security's 3.2% COLA already seems to be falling a bit short, and that's bad news for seniors either way.
Those who are currently reliant on Social Security may need to look at cutting expenses this year if they find that their COLA is truly failing. For some, that could mean whittling an already modest budget down even further.
