Social Security is crucial for most retirees. It provides about 30% of income for Americans age 66 or older. According to the Social Security Administration (SSA), “Among Social Security beneficiaries age 65 and older, 12% of men and 15% of women rely on Social Security for 90% or more of their income.”
A major benefit of Social Security is that benefits increase in most years, allowing retirees to keep up with inflation – through cost-of-living adjustments (COLAs). The latest COLA was just announced and there was no widespread joy.
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The latest COLA, which will come into effect in 2025, was recently announced and is… 2.5%. That is very close to the average annual increase of 2.6% over the past twenty years. The table below lists some recent Social Security COLAs:
|
Year |
COLA |
|---|---|
|
2024 |
3.2% |
|
2023 |
8.7% |
|
2022 |
5.9% |
|
2021 |
1.3% |
|
2020 |
1.6% |
|
2019 |
2.8% |
|
2018 |
2% |
|
2017 |
0.3% |
|
2016 |
0% |
|
2015 |
1.7% |
Source: Social Security Administration.
If you think 2.5% isn’t much of an increase, you’re not alone. We at the Motley Fool surveyed a number of retirees and found that 54% considered this inadequate. In fact, 31% found it “completely inadequate.”
I understand the sentiment – because as of September the average monthly retirement benefit was $1,922 – or only about $23,000 per year. That’s far from enough to support most of us through retirement. Increase it by 2.5% and it rises to just $23,641 – only about $577 more, and an increase of just $48 per month.
Worse, COLAs are likely to disappoint many more times unless they commit to a more appropriate inflation measure: the CPI-E, not the CPI-W. The CPI-W is intended to reflect the spending of workers, while the CPI-E is intended to better reflect the spending of older people. For example, medical care carries more weight – a category where costs have risen higher than average.
If you have earned more than average during your working life, you are of course likely to receive more than average benefits. But they still probably won’t come close to providing everything you need or want. What can you do to prepare for your retirement?
A good strategy is to build multiple income streams for retirement. Be sure to save and invest for your retirement – save aggressively and invest effectively. Figure out how much you’ll need in retirement, and then figure out how you’re going to raise it.
