Goodbye to 2024 Cost of Living Adjustment – Social Security Announces Checks Will Change Again on January 1

The Social Security Administration (SSA) recently confirmed the cost-of-living adjustment (COLA) for 2025, which will soon be reflected in the benefits retirees receive next year. Social Security benefits play a vital role for millions of Americans over 66, often constituting about 30% of their income. In fact, among those 65 and older, Social Security is the primary income source for 15% of women and 12% of men, according to SSA data. Designed to keep pace with inflation, Social Security’s COLAs generally increase benefits to help beneficiaries maintain purchasing power. However, the latest COLA announcement fell flat for many, with beneficiaries finding it far from adequate.

Social Security Benefits Increase for 2025

Starting January 1, 2025, monthly Social Security benefits will rise by 2.5%, a figure aligned with the average annual COLA increase of 2.6% over the past two decades. For context, the recent history of COLA increases shows both fluctuations and a general trend of modest adjustments:

Year	COLA Increase
2015	1.70%
2016	0%
2017	0.30%
2018	2%
2019	2.80%
2020	1.60%
2021	1.30%
2022	5.90%
2023	8.70%
2024	3.20%
2025	2.50%

Despite the increase, beneficiaries are feeling underwhelmed. A survey by Motley Fool found that over half (54%) of retirees believe the increase is insufficient, with 31% stating it as “completely insufficient.” With the average monthly benefit at around $1,922, or just over $23,000 annually, a 2.5% boost translates to roughly $577 annually—or about $48 more each month.

Challenges with the Current COLA Measurement

Social Security’s COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks expenses primarily for working-age individuals. However, this index does not fully capture the spending patterns of retirees, who face higher-than-average expenses in categories like healthcare. Many experts argue that the Consumer Price Index for the Elderly (CPI-E) would be a better gauge, as it focuses more on categories impacting older Americans. Switching to CPI-E could lead to more substantial adjustments that reflect the actual cost of living for retirees, offering a fairer, more supportive increase.

Preparing for Retirement Beyond Social Security

While Social Security plays a substantial role in retirement income, it was never designed to cover all expenses. Instead, it works best when part of a well-rounded retirement plan that includes various income streams. Here’s a look at some potential sources to supplement Social Security:

• Part-time work before retirement: Earning additional income through a side job or freelance work can add to your savings.
• Stock dividend income: Investing in dividend-paying stocks can offer a steady income stream.
• Rental property income: Rental income from real estate investments can supplement retirement funds, especially if properties are paid off.
• Pension plans: If you qualify for pension income, it can offer a predictable monthly income.
• Retirement accounts: Withdrawals from 401(k)s, IRAs, or other retirement accounts can provide an essential income source in retirement.
• Fixed-income investments: Bonds, certificates of deposit (CDs), and high-yield savings accounts can offer reliable interest payments.
• Inheritance: While not a guaranteed income source, inheritances can sometimes add to retirement security.
• Other creative income sources: Selling assets, cashing out life insurance, or taking a reverse mortgage are alternative ways to generate income in retirement.

Building a diversified income portfolio that does not heavily rely on Social Security is critical. For instance, even delaying retirement by a few years can significantly boost the amount you’ll receive each month.

Retirement Planning Tips to Reduce Dependency on Social Security

A strong retirement strategy can ease the need to depend on Social Security as the primary income source. Here are some ways to fortify your financial foundation for retirement:

1. Set retirement goals: Begin with a clear target for how much you will need based on your expected retirement lifestyle. Use this to guide your savings and investment strategies.
2. Invest wisely: Explore diversified investments that offer potential growth and income.
3. Start early and save aggressively: The earlier you start, the more time your investments have to grow.
4. Consider delaying Social Security: Waiting beyond the minimum eligible age (62) until age 70 can increase your monthly benefit by up to 8% per year.
5. Use tax-advantaged accounts: Maximize contributions to accounts like 401(k)s and IRAs, which offer tax benefits and compound growth.
6. Reevaluate spending: Budget for retirement by prioritizing essential expenses and finding areas where you can reduce spending if needed.

Social Security may not cover most retirement expenses, so it’s essential to take charge of retirement planning. The better prepared you are, the more financial flexibility you’ll have in retirement.

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