The Biden administration appears to have pulled off the elusive economic soft landing, getting inflation in check without crashing the economy into a recession. While inflation has been easing downward, it has still been pinching retirees’ budgets. The bad news is that shrinking inflation rates also mean a smaller Social Security cost-of-living (COLA) for 2025.
The 2025 Social Security cost-of-living adjustment will kick in via your January check (or direct deposit from SS). So, current Social Security recipients will continue to see their retirement incomes stretched thin this month as we move through the holidays.
The Social Security Administration (SSA) announced that the Social Security cost-of-living adjustment for 2025 will be just 2.5%. This COLA is much lower than the 8.7% retirees received in 2022.
Also, remember that your 2025 Social Security COLA could increase the taxes you pay on your Social Security benefits.
How Is The Social Security COLA Calculated Each Year?
To calculate the Social Security COLA for 2025, the SSA uses the average inflation in the third quarter, based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), to calculate how much of an increase in Social Security benefits will be needed for the following year.
Does The Social Security COLA Even Matter?
I hope your fun financial planner has done such a fabulous job helping you build a retirement income stream you can’t outlive. I hope this income stream is so big that you don’t even notice the Social Security COLA each year. For most retirees, this is not the case. According to the Social Security Administration, around 12% of men and 15% of women rely on Social Security for more than 90% of their retirement incomes.
For 2025, the average Social Security check averaged $1,968 per month. Most of you would have trouble living off of this amount; after rent, there would be little money left over for important things like food and utilities.
When you live on a fixed income, every penny counts. So, yes, the Social Security COLA does matter.
What Is The Maximum Social Security Benefit For 2025?
According to the Social Security Administration, the maximum income benefit will depend on the age when you retire and begin taking benefits. For example, if you retire at full retirement age in 2025, your maximum Social Security benefit would be $4,018. However, if you retire early at 62 in 2025, your maximum Social Security benefit would be $2,831. If you wait to retire at age 70 in 2025, your maximum benefit would be $5,108.
As you can see, it pays to wait to claim Social Security.
Remember, these are the maximum Social Security benefits. Most retirees receive far smaller checks. Your monthly amount will be determined based on your income before you retire, and keep in mind that these checks won’t come close to replacing your pre-retirement income. You should do some additional retirement planning to ensure you can maintain your standard of living in retirement.
How To Get Your Own Personalized Social Security Estimate
As a fiduciary financial planner, I encourage you to download your Social Security estimate from ssa.gov. It will give you the estimated retirement benefits you can expect based on your work history and the age at which you would like to begin receiving benefits. These estimates are typically updated annually.
Knowing your Social Security numbers will help you understand what else to do to plan for a secure retirement. While Social Security is not enough for most people to live off (comfortably), it is an income stream you can’t outlive.
Social Security benefits were not designed to replace your entire pre-retirement income, and you will likely need to invest in IRAs, Roth IRAs (for tax-free income), 401(k)s, or other workplace retirement accounts. On a brighter note, Social Security is a lifetime benefit that should pay out as long as you are alive.