For 2023, Social Security Retirement and Supplemental Security Income (SSI) benefits increased due to inflation. The increase was 8.7%, resulting in an average monthly benefit increase of $146 per month for a yearly increase of $1,827 in 2023.
Social Security benefits are adjusted yearly for inflation as a cost-of-living adjustment (COLA) based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W index measures the monthly price change in a market basket of goods and services, including food, energy, and medical care.
With the inflationary prices Americans experienced in 2022, the 2023 Social Security COLA adjustment helped increase monthly benefits. While we can’t predict what inflation will do in 2023, the Consumer Price Index may decrease if inflation cools. In this instance, the Social Security COLA could be much less.
According to estimates by The Senior Citizens League, using current inflation data from the Consumer Price Index, it's estimated that there will be a 3.1% COLA increase in 2024. The 3.1% COLA increase would be the lowest since 2020, when there was a 1.3% increase. Social Security benefits represent about 30% of income for Americans aged 65 and older.
Social Security was meant to be one source of retirement income, with monthly retirement income from other strategies such as:
Traditional IRAs- Traditional IRAs fund with pre-tax contributions, which grow tax-deferred. IRA contributions and accumulation are taxed at the owner's tax rate and are penalty-free if taken after age 59 1/2 when taken as distributions. If distributions occur before age 59 1/2, they tax as ordinary income, and an early distribution penalty of 10% may apply.
Roth IRAs- Roth IRAs fund with after-tax contributions, so you pay taxes upfront. When you take distributions, both the contribution and accumulation are tax-free. Contributions are withdrawn tax and penalty-free for emergencies, home purchases, and more. However, drawing the account's accumulation before age 59 1/2 will result in a 10% IRS penalty.
Annuities- Annuities offer tax-deferred growth of earnings, protection of principal, and a guaranteed lifetime income. Annuities are contractual agreements with an insurance company that provide an investor with a guaranteed income stream during retirement in exchange for a premium.
Cash Value Life Insurance- Cash value life insurance provides insurance for your entire life. With this type of life insurance, if you pay the premiums on time, the cash value accumulates, providing you with the cash you can use in retirement by taking a policy loan. If cash remains in the policy, beneficiaries will receive the remaining value as a death benefit after the policy loan is satisfied.
It’s important to not rely on Social Security and COLA increases as the primary source of retirement income. A financial professional can help you plan for your situation by implementing other retirement savings strategies so that Social Security COLA adjustments aren’t so impactful.