Social Security is an important part of millions of Americans' retirement plans and finances. For some, Social Security is a "nice-to-have" income source. For others, it's a large part or all of their retirement income.
Unfortunately for those who fall into the latter category, Social Security is beginning to lag behind the increasing cost of living in the country, causing some people to consider returning to the workforce.
If you're in your golden years and decide to return to the workforce, it should be because you want to, not because your financial situation forced you. However, life happens, and sometimes, it's inevitable.
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The Social Security COLA is appreciated, but it's just not enough
To help offset the effects of inflation, Social Security provides an annual cost-of-living adjustment (COLA). In an ideal world, this annual COLA would cancel out inflation, but that's just not the case for many people.
The COLA beginning in 2025 will be 2.5%, the lowest since 2021 and below the 3.75% average since COLAs became an annual occurrence in 1975. According to a recent Motley Fool survey, 54% of retirees believe the new COLA is insufficient, and around half are considering returning to work because of low Social Security benefits.
For perspective on what recipients are working with here, below are the current average monthly benefits at ages 62 to 70 (the range of ages you can claim Social Security), and what those averages look like when you account for the COLA.
| Age | Current Average Monthly Benefit | Average Monthly Benefit With COLA |
|---|---|---|
| 62 | $1,274 | $1,305 |
| 63 | $1,365 | $1,399 |
| 64 | $1,411 | $1,446 |
| 65 | $1,504 | $1,541 |
| 66 | $1,719 | $1,761 |
| 67 | $1,844 | $1,890 |
| 68 | $1,848 | $1,894 |
| 69 | $1,818 | $1,863 |
| 70 | $1,963 | $2,012 |
Data source: Social Security Administration. Benefit amounts are rounded down to the nearest dollar. Table by author.
The COLA-adjusted average benefits aren't definitive and will change based on new claimers and other population changes, but they shine a light on how modest and limiting the COLA is for some retirees.
Delay claiming Social Security as long as possible if you can
The most direct way to guarantee a higher Social Security monthly benefit is to delay claiming benefits as late as possible. Your full retirement age is when you're eligible to receive your baseline monthly benefit (called the primary insurance amount), but you can claim before or after that age.
Here are full retirement ages based on your birth year.
Data source: The Motley Fool.
If you decide to delay benefits past your full retirement age, the monthly benefit is increased by two-thirds of 1% each month, or 8% annually, until you reach age 70. If your full retirement age is 67 and you delay benefits until 70, you can expect a roughly 24% increase in your monthly benefits.
For some, waiting until 70 isn't realistic because they need the benefits for their livelihood in retirement. That's understandable. But if you're able to survive from other income sources, it's worth considering the delay to lock in a higher monthly benefit.
Attack retirement savings from multiple angles
The best way to offset low Social Security benefits is to be proactive and ensure you have multiple retirement income streams. It's easier said than done, but it's crucial to make sure you're not fully reliant on Social Security.
A 401(k) is the most popular non-Social Security stream of income in retirement, but those are only offered through employers, so not everyone has access to one. IRAs, on the other hand, can be opened with relative ease by anyone.
There are two main types of IRAs -- traditional and Roth -- and each has a unique benefit and tax break. Contributions to a traditional IRA are potentially tax-deductible in the year you make them, but you must pay taxes on money withdrawn in retirement. Roth IRA contributions aren't tax-deductible, but you can take tax-free withdrawals in retirement.
In an ideal world, you'd go into retirement with money in retirement accounts and investments in a brokerage account, and Social Security would be supplemental income. Again, it's much easier said than done but feasible.
Even if you don't think you have much to contribute to a retirement or brokerage account, don't underestimate the power of small, consistent investments. The compounding effect rewards people for their consistency and willingness to start stashing money aside early.
