Inflation is an obvious concern for retirees. Living on a fixed income and seeing volatility impact your retirement portfolio can be stressful and daunting. A silver lining may be on the horizon. The Senior Citizens League has indicated that the cost-of-living adjustment (COLA) for 2023 could be around 9.6%, the highest increase since 1981. COLA increases are set in October.
The reason for the increase is simple: Prices are going up, particularly for older people. The Consumer Price Index (CPI) was up 8.5% annually in June. Some of the biggest price jumps, especially for seniors, were in the following categories, from the Bureau of Labor Statistics (BLS):
Double digit price increases in multiple sectors are hurting your purchasing power.
From the data, its apparent that the price increases for some component costs of retirement living are vastly exceeding the potential increase in benefit.
Second silver lining. One second silver lining is that the COLA rate that will be determined in October will be effective for all of 2023. Conceivably, oil prices could come down, and because of the cascading effect of energy pricing to other items, potentially other costs could come down as well, and the retiree could continue to receive the higher benefit.
How big is the increase? According to the Social Security Administration (SSA), the average monthly benefit as of July 2022 was $1,670.95. A 9.6% increase would bring that up $159. Recognize that the October COLA increase number is based on the prior three months of July, August, and September. If inflation goes up, the increase could be bigger, and vice versa. With July under our belt, the next two months will tell the tale. The Senior Citizen’s League estimates the increase will be announced October 13, 2022.
The increase will be bigger for married retirees. First, the COLA affects both social security benefits, so a couple with two average benefit checks would see their benefit go up by $318. For higher earners at or above the Social Security wage base, they would receive a maximum benefit. For 2022, the maximum benefit at Full Retirement Age would be $3,345 a month. It would be $2,364 a month if you collected at age 62, and $4,194 a month if you waited until age 70 to collect. Thus, someone who was maximizing their benefit by waiting until age 70 would potentially receive a $402.62 increase in their check. A couple who both delayed collecting benefits and were at the maximum scale would have upwards of an $800 increase each month. The COLA increases are permanent, and reset the benefit, so the 2023 benefit will be adjusted in 2023 (in October) for whatever the CPI-W does then.
Don’t forget taxes. Of course, you may (probably) pay taxes on some of your Social Security benefits. You are taxed on a portion of your benefits:
Your benefits may be taxable if the total of (1) one-half of your benefits, plus (2) all of your other income, including tax-exempt interest, is greater than the base amount for your filing status.
The base amount for your filing status is:
- $25,000 if you’re single, head of household, or qualifying widow(er),
- $25,000 if you’re married filing separately and lived apart from your spouse for the entire year,
- $32,000 if you’re married filing jointly,
- $0 if you’re married filing separately and lived with your spouse at any time during the tax year.
Depending on how far over the base amount you find yourself, either 50% or 85% of your benefits would be taxable. If you’re under the base amount, none of your benefits are taxable.
The IRS has a useful way of figuring out the taxability of benefits. Note that when the benefits go up, your income goes up and the taxes go up. If the new increase takes your over the thresholds for taxation, you could see in an increase in income taxes.
Bottom line. If you are collecting Social Security, keep an eye on the next two months inflation numbers. You’ll probably be wishing for high number for the next two months, then a drop in prices (hopefully for a long time). Watch your taxes on the benefits as the increase kicks in for 2023. This is probably a really good time to review your financial goals and objectives, including your spending. As always, I’ll try to answer questions: llabrecque@sequoia-financial.com.