Social Security recently announced good news for retirees. In 2019, benefits will increase 2.8 percent. That’s the largest cost-of-living adjustment (COLA) in more than a decade. Last year benefits increased only 2 percent, and they didn’t increase at all in 2010, 2011 or 2016.1
Cost-of-living adjustments are meant to help retirees cope with inflation. Inflation is a natural part of the economy. As the economy expands, costs for labor, materials and other resources tend to increase. That drives up prices for a wide range of goods and services. While inflation isn’t necessarily a bad thing, it can be dangerous for seniors on fixed incomes.
That’s where COLA comes in. Social Security offers COLAs to help seniors keep up with inflation and maintain their standard of living. The cost-of-living adjustments are based on a broad version of the consumer price index (CPI). However, there’s been debate about whether Social Security’s formula is actually appropriate.
Why COLA May Not Be Accurate for Retirees
There are a couple of reasons why you shouldn’t count on a COLA to help you keep up with inflation. First is the way in which COLA is calculated. Social Security uses the CPI-W as an inflation index. The CPI-W is based on expenses for urban workers.
Retirees have different expenses than workers, though. Many retirees spend much more of their income on health care than the average worker does. They also may face increased costs for housing, especially if they’re staying in an assisted living facility. The CPI-W doesn’t account for this increased spending on health care and housing, so the inflation rate may not be appropriate for retirees.
Also, Social Security probably doesn’t cover all your retirement spending. After next year’s increase, the average Social Security benefit will be $1,461 per month.2 While that’s a helpful amount, it’s probably not enough to fund your entire retirement. That means you’ll also need to increase your other income streams to fully keep up with inflation.
Tips to Plan for Inflation
There are a number of strategies you can implement to increase your income and keep pace with inflation. One is to stick with a long-term plan and remember that you’ll need growth to fund a long retirement. Work with your financial professional to develop a strategy that minimizes risk but also allows for growth to increase your income.
You could also use annuities, which are effective tools for creating guaranteed* lifetime income streams. Some offer inflation protection so your income increases each year. Others, like variable annuities, allow you to grow your assets and lock in gains, and then take guaranteed* income for life.
A long-term care insurance policy with an inflation rider could also be helpful. The costs of long-term care are rising every year. An insurance policy with an inflation rider will increase your benefit so it keeps pace with rising costs. When you need long-term care, the insurer will pay some or all of the expense.
Ready to develop your retirement inflation strategy? Let’s talk about it. Contact us at Senior Care Alliance today. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.
*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
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18149 - 2018/10/17