Daily Press (Sunday)

What the 2024 Social Security COLA could mean for your retirement

- By Dalia Ramirez

Social Security benefits for millions of people will rise by an average of over $50 a month starting in January, thanks to the Social Security Administra­tion’s 3.2% annual cost of living adjustment for 2024, announced on Oct. 12. The change will immediatel­y put more money in current retirees’ pockets, but it also could have a considerab­le effect on payouts to future retirees.

The 2024 increase is much smaller than last year’s 8.7%, the largest since 1981. But because the COLA reflects inflation, a smaller increase is not necessaril­y a bad thing; it suggests that inflation is more stable and may help the Social Security Administra­tion provide maximum benefits for longer.

The COLA has been relatively volatile in recent years, however, and future retirees are understand­ably concerned about the health of the Social Security benefits program.

Here’s what the cost of living adjustment­s really mean and how to factor Social Security benefits into your future retirement budget.

A lower COLA is a good sign

Though it’s reasonable to assume that a lower cost of living adjustment is worse for Social Security recipients, it may also point to a healthier economy. The SSA increases the COLA in response to inflation, which means that a hefty COLA jump — like last year’s 8.7% — reflects a serious bump in the costs of goods and services.

“The (Federal Reserve’s) goal is for inflation to be 2% or lower, and therefore, the COLA increases by Social Security would be 2% or lower,” said Randall Holcombe, a certified financial planner and director of wealth planning at Confluence Financial Partners in Pittsburgh.

“If your costs aren’t going up so much, then your Social Security isn’t going up as much, but then again, you don’t need Social Security to go up as much,” he said.

Many financial planners incorporat­e a flat annual COLA into their clients’ retirement plans. “I typically build in an inflation rate of around 3%,” said Elaine Floyd, a certified financial planner and director of retirement and life planning at New York-based financial advisory firm Horsesmout­h LLC.

“We want to be conservati­ve when we’re projecting Social Security income,” Floyd said. Even this year’s increase may not be the most accurate predictor of what your benefits might look like decades in the future.

Focus on wages

The COLA isn’t the only annual change to Social Security benefit amounts. Yearly changes to the lesser-known national average wage index can also significan­tly impact current and future retirees. The SSA applies the index to your 35 highest-earning years in the workforce as part of its benefits calculatio­n.

“Wages tend to rise faster than prices,” Floyd said. The most recent increase in the average wage index is 5.32%, more than the 3.2% COLA.

“I really want younger people to understand the connection between their own earnings and their eventual Social Security benefits,” Floyd added. She suggests thinking about that connection throughout your career, especially when making decisions about sabbatical­s or job choices.

“Your eventual benefits will reflect the rise in wages over your career,” she said. “Ask for those raises.”

Don’t discount Social Security entirely

Many workers set to retire after 2034, when the SSA currently expects to deplete the reserves it holds in the Social Security trust fund, are concerned about whether they can count on Social Security benefits. Social Security benefits now make up, on average, 30% of retiree income, according to the SSA, a significan­t chunk.

But Holcombe said he reminds wary clients that most of the Social Security program is funded directly from current employee and employer taxes.

Because of declining birth rates, the gap between the number of workers paying Social Security taxes and the number of retirees receiving benefits is larger now. “The trust fund exists to make up the shortfall,” Holcombe said, explaining that the fund works as a buffer to ensure retirees receive full benefits despite declining taxpayer funding.

There are ways to prepare for volatility or major changes, especially if you have a while to go before retirement. Individual retirement accounts and a well-rounded investment portfolio can balance out some of that uncertaint­y over the course of decades.

“A little bit over a long time goes a long way with the stock market,” Holcombe said. “It’s a lot easier to make those adjustment­s in your 20s and 30s than it is when you’re 50 to 60 and thinking about retirement.”

Holcombe added that any changes the SSA makes to the program are more likely to affect future retirees, who have more time now to plan accordingl­y.

“It is not prudent to assume there won’t be any changes by the time (millennial­s) retire,” Holcombe said. “But it’s also not prudent to discount Social Security entirely.”

 ?? VALERIE MACON/AFP ?? The logo of the US Social Security Administra­tion outside a Social Security building, November 5, 2020, in Burbank, California. Social Security benefit amounts adjust for inflation every year; here’s how to make the most of those changes for 2024.
VALERIE MACON/AFP The logo of the US Social Security Administra­tion outside a Social Security building, November 5, 2020, in Burbank, California. Social Security benefit amounts adjust for inflation every year; here’s how to make the most of those changes for 2024.

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