Are Social Security benefits an important part of your retirement income? If so, you might want to keep your eyes and ears open on Thursday, October 10. Then the cost of living adjustment for the coming year’s monthly payments will be announced. These increases are intended to maintain the purchasing power of retirees by keeping pace with inflation.
Of course, sometimes they are still not enough.
Therefore, it wouldn’t be wrong to think about your bigger financial picture for the coming year. Whether or not the looming increase in Social Security benefits is fair and reasonable, there are some strategic actions that investors may want to consider in the meantime.
Retirees, mark your calendars
If you’re a retiree feeling a little strapped for cash these days, you’re not alone. Although the Social Security Administration increased the average payout by 3.2% (about $58 per month) in January of this year, prices have continued to rise in the meantime. The Bureau of Labor Statistics reports that consumer costs have increased about 2% since the end of 2023. For older people who may spend more than younger people on services like health care, the cost is closer to 3%.
If you’re on a budget, these nickels and dimes add up.
Fortunately, this inflation is more or less in line with the expected increase in the cost of living (or COLA). While the Social Security Administration doesn’t make official predictions, the Senior Citizens League’s most recent forecast suggests that the COLA for Social Security benefits will be a respectable 2.5% in 2025. That expected increase is slightly lower than the projections made earlier this year, although inflation has since cooled somewhat.
Whatever the final increase, the Social Security Administration will announce it on its website on Thursday, October 10. There is little doubt that most of the financial media industry will share the news widely shortly thereafter.
As a retired (or soon-to-be-retired) investor, your goal is of course not to overtax this specific number no matter what. You should strive to do even better with your own income-generating investments. At that point:
3 things every retiree should do no matter what
Social Security was never intended to cover the entirety of a person’s retirement income. With an average monthly payment of just over $1,900, it’s almost unlivable on its own. You will probably want (and need) to supplement this income. That means saving and investing money in your working years, then making the most of them when the time comes.
If you’re looking forward to these annual COLA numbers, you’re probably already at least semi-retired and probably not adding a meaningful amount of money to your retirement nest egg. However, that doesn’t mean you shouldn’t re-examine the money you’ve saved. You may want to think about doing the following regardless of what the Social Security Administration announces on Thursday.
1. Lock in interest rates on bonds before interest rates fall further
Bond investors who live off their interest income must first and foremost build a so-called bond ladder. That just means arranging the maturity dates of all your fixed income investments (Governments, CDs, corporate bonds, etc.) so that they are evenly spread out over the next few weeks into the next few years. Such a structure hedges the unique risks of your bond portfolio while ensuring that your net interest payments remain relatively stable over time.
On the other hand, the Federal Reserve has clearly said it expects a cut in the federal funds rate of at least 100 basis points between now and next year, with less aggressive rate cuts planned the year after that. Although interest rates on the above-mentioned fixed income instruments have already fallen thanks to last month’s 50 basis point cut, they are likely to fall again soon.
It wouldn’t be a bad idea to overload certain maturities of your bond ladder with more higher yielding positions than you would normally want to hold. (Just don’t be silly: Fundamental diversification is still important.)
2. Reexamine all your dividend-paying stocks
It’s easy to conclude that the higher-yielding stocks in the stock market are the best choice for income-oriented investors. However, that is not necessarily the case. It’s not unusual for dividend stocks with higher yields to post an anemic increase in their payouts – assuming they actually offer dividend growth at all. While for example Kraft Heinz boasts a healthy forward-looking dividend yield of 4.5%, but the consumer staples company hasn’t raised its $0.40 quarterly payment since the start of 2020. Patient shareholders actually lose their purchasing power.
Then there are the less obvious unwise decisions. To take Coca-cola And PepsiCo as examples. While Coca-Cola is typically the preferred investment of the two due to its greater stature, PepsiCo’s forward-looking dividend yield of 3.2% is actually better than Coca-Cola’s dividend yield of 2.7%. PepsiCo also boasts stronger dividend growth than its larger rival.
Given that Social Security’s inflation adjustments ensure that no recipient ever actually makes net progress in terms of the disposable income it produces, investors will only be able to achieve this on their own – with their own savings. It’s worth making the most of it.
3. Compare your expenses with the income-generating potential of your portfolio
Last but not least, you’ll want to figure out how much money you’ll actually spend next year, and then determine whether your current portfolio can generate that amount at all (without compromising its ability to do the same in the future). ).
Yes, holding the right stocks and bonds is part of the equation. But it’s not the only part. The allocation is also a factor. Can you achieve your short-term goals and still achieve your long-term goals with fewer stocks and more bonds? Is it possible that you need more capital growth from your dividend-paying stocks?
There is more to the story. Given that Social Security COLAs don’t always seem to fully keep pace with actual increases in retirees’ living costs, you may also need to reconsider and reset your retirement spending plans. Do you really watch all those streaming channels regularly? Maybe it’s time to make a call about your car insurance options. Maybe you can forego one of your regular restaurant visits. As noted above, the nickels and dimes can add up over the course of a year.
Whatever you have to do, be prepared for the big news on October 10th.
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James Brumley has positions in Coca-Cola. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
All Social Security retirees should do this by October 10. was originally published by The Motley Fool
