October 25, 2021

Inflation in Retirement and Breaking Social Security News! Ep #215

14 minutes

If you are like many Americans who watch the news, inflation is probably on your mind. Since the Covid 19 pandemic began costs have been rising. We are still facing the effects of the supply chain breakdowns brought on by the pandemic in addition to extreme worldwide weather events.

These events have led to an increase in the price of goods on everything from fuel to food to lumber. This type of inflation can be stressful for the average working family but even more worrisome for those on the cusp of retirement.

Listen in to hear the latest Social Security news and learn how you can combat rising costs. Make sure to scroll down to the bottom of the show notes to access all the links mentioned in this episode.

Outline of This Episode

[2:52] Good news about Social Security
[4:26] How COLA is calculated
[5:40] COLA may not be enough to keep up with inflation
[9:28] What can we do to hedge for inflation?

Recipients of Social Security are getting a raise

If you are already retired and receiving your Social Security benefits, I have good news! The annual cost of living adjustment (COLA) will increase by 5.9% in 2022 which will boost the individual income of recipients by about $92. This is the largest increase in Social Security benefits since the 7.4% augmentation in 1983.

Over the past decade, the rise in COLA has been negligible, only averaging 1.65%. This minimal increase is due to the way COLA is calculated. This calculation is based on the change in prices of a market basket of goods as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPIW).

Even with next year’s close to record-breaking increase, COLA may not be enough to truly combat inflation.

Are yearly inflation adjustments to Social Security enough to truly keep up with inflation?

Despite yearly inflation adjustments, Social Security benefits have decreased their buying power by 32%. Even though COLA has increased benefits by 55% since 2000, senior citizens’ expenses have actually increased by 104.8% over this same timeframe.

This ThinkAdvisor article has a photo slideshow that illustrates 10 costs that older Americans have seen risen over the past 20 years.

The article cites The Senior Citizens League (TSCL), an advocacy group, which is trying to change the way COLA is calculated. While TSCL supports legislation that could modestly increase COLA, you won’t want to wait for Congress to ensure that you can maintain buying power in retirement.

What can we do to hedge for inflation in retirement?

Buying (and holding) stocks in the best companies in the world is the best way to hedge for inflation. The best companies in the world will hire the best employees in the world, and together they will figure out how to find efficiencies and raise prices which will provide you with positive returns and an increasing long-term share price, regardless of inflation.

An allocation to 50-70% stocks should be plenty to keep your portfolio growing, which will grow your account balances over the long term and allow you to increase your monthly distributions. With this kind of diversified portfolio, you’ll be able to use your cash and bonds to weather the storms and ride out bumpy markets.

How are you planning to combat inflation in your retirement plan?

Resources & People Mentioned