Every year, the Social Security Administration reviews the inflation and wage numbers for the previous year. With that information, it determines what changes (if any) need to be made to the taxable wage base and benefit levels to execute the cost-of-living adjustment for Social Security.
Whether you're earning money to pay for your eventual benefits or you're already receiving them, these changes impact you. If you're receiving benefits, you'll get a small raise based on the recent inflation level. If you're paying Social Security taxes on your income, the amount of income subject to taxation is increasing. If you're reaching full retirement age in 2015, the maximum you might be eligible to receive is also increasing a bit.
How big are the changes?
If you're receiving Social Security benefits, your check will rise by 1.7% in 2015. The Social Security Administration says the average payout to a retiree in January 2015 will rise to $1,328 from $1,306. That 1.7% raise is based on the rise in the Bureau of Labor Statistics' Consumer Price Index for all urban workers for the 12 months ending October 2014.
If you're paying Social Security taxes on your earned income, the first $118,500 you earn will be subject to the tax, up from $117,000 in 2014. That 1.3% increase is based on changes to the National Average Wage Index, and it's the smallest since the period from 2009 to 2011, when the maximum didn't move at all.
If you expect to claim benefits upon reaching full retirement age in 2015, your maximum benefit will be $2,685.50 per month. That's up a bit from $2,642 for 2014 and is based on changes to the benefit calculation that compares your salary to the Social Security wage base each year. If you delay benefits past full retirement age, your benefit will increase about 8% per year until your 70th birthday, at which point the increases stop.
Is that raise enough?
The average Social Security check will increase by about $22 per month in 2015. While that's in line with the overall inflation rate for urban workers, it might not match what you experience as a retiree. The key reason is that as you age, your needs shift from those of a typical urban worker.
One key difference between a retiree and a younger employed person is healthcare costs. Even before considering inflation, healthcare costs tend to increase as we age. On top of that, the inflation in healthcare costs has generally been higher than the overall inflation rate. That one-two punch makes it quite possible that your costs as a retiree could increase faster than your Social Security check will compensate.
If you've already left the workforce and are heavily dependent on Social Security, there might be little you can do to cover those escalating healthcare costs aside from cutting back spending elsewhere. If you still have time before you collect, one of the best gifts to give your future self is a plan to deal with that exposure to inflation levels above and beyond what Social Security will cover.
By and large, this means you'll probably need to invest, and even in retirement you'll likely need some exposure to stocks in your investments. Interest rates on bonds don't really cover current inflation at the moment -- unless you go out a decade or so. If you do invest out that far, you run the risk that an increase in long-run inflation will evaporate the benefit you get from a slightly higher rate today.
While stocks are volatile and can go down, they have the potential to provide real growth above and beyond inflation over time. If you're expecting a fairly long retirement, you'll need that real growth to enable you to cover those costs.
Are you ready for 2015?
Whether you're a retiree or are still working toward your golden years, changes to Social Security will affect you in 2015 and beyond. Understanding the changes coming next year should help you determine how to cover the rest of your costs in retirement. The sooner you start to plan for it, the better your chances will be of enjoying a comfortable retirement.
Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.