While inflation is a worry for everyone, it can be especially problematic for those on a fixed income. Some 37% of men and 42% of women rely on Social Security for 50% or more of their income, and inflation is a major risk to their standard of living. Fortunately, the system does provide for cost-of-living adjustments (COLA) to help retirees keep pace with inflation. Each year, the federal government calculates a percentage of increase to raise the monthly stipends for recipients — although there’s no guarantee of an increase in any given year.
Which Inflation?
There are several official calculations of inflation. The most familiar is the Consumer Price Index (CPI), but even this one has more than one flavor. The number that gets most of the headlines is CPI-U, the Consumer Price Index for All Urban Consumers. However, the index used to set each year’s COLA is CPI-W, the Consumer Price Index for Urban Wage Earners and Clerical Workers. This index measures prices paid by people in urban areas who get more than half of their family income from clerical or hourly wage jobs.
The Social Security Administration calculates the difference between the average CPI-W for the third quarter of the current year and that of the third quarter from the previous year. If there has been an increase, the COLA raises monthly payments for recipients.
Your Personal Inflation
Once you retire, you’re most likely not the urban hourly worker on whom the CPI-W — and the Social Security COLA — are based, and inflation may impact you quite differently based on what you actually purchase. If you own your home mortgage-free, the cost of housing, a major contributor to inflation in recent years, may affect you less. As a retiree, you’re also probably not commuting (or at least not as much), so fluctuations in fuel prices will not matter as much. Plus, depending on where you choose to retire, there are vast regional variations in prices of everything from sliced ham to auto insurance.
Simply put, the COLA may or may not make up for rising prices for the things you actually buy. Spending mindfully is key to managing inflation while living on Social Security. Here are some tips:
- Downsize your home. Even if you don’t have a mortgage, going smaller or moving from a single-family house to a condo could lower maintenance, insurance and other costs — and could help you add to your retirement nest egg.
- Relocate to a less-expensive area. Some states are significantly more affordable than others and may not be the best place for retirees relying on Social Security to live. Also, most dense, urban areas have higher costs for housing and many other necessities.
- But don’t ignore the availability of senior-friendly services. Those pricey urban areas may have free or more-affordable senior services like easy access to health care facilities, public transportation and meal delivery services that aren’t widely available in less dense areas like suburban or rural towns.
- Are you eligible for Medicaid? Even if you receive Medicare, it doesn’t pay for everything, and Medicaid can make up the difference for some low-income retirees.
- Boost your savings. Increasing your retirement contributions now can help provide greater financial security when you do eventually leave the workforce.
Taking proactive steps now can make a significant difference in your financial well-being later. A Financial Professional can help guide you through the complexities of Social Security benefits and offer strategies to reduce expenses and explore supplemental income sources in retirement.
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