With July getting under way, 2024 is half over -- hard as it may be to believe. The new year will be here before most people know it, so it's time for seniors to start looking ahead financially to prepare for what life may look like in 2025. This is especially important because retirees -- especially those who have left the workforce in the post-pandemic era -- could be in for an unpleasant surprise next year.
Seniors could find themselves facing a big disappointment when it comes to the cost-of-living adjustment (COLA) they receive if they are collecting Social Security benefits. Many retirees rely on these COLAs to help them cover rising costs, and they are likely to be pretty unhappy when they see what happens to their retirement benefits in 2025.
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Seniors aren't going to get the COLAs they are used to lately
Since the COVID-19 pandemic started to wane, seniors have enjoyed a string of large increases to their Social Security benefits over the past few years. Specifically:
- In 2024, benefits increased by 3.2%
- In 2023, benefits increased by 8.7%
- In 2022, benefits increased by 5.9%
Next year, though, things could change. In fact, the Senior Citizens League (TSCL), a nonprofit senior advocacy group, has recently projected that retirees are in line to get only a 2.57% benefits increase next year.
That's the smallest benefits bump since 2021 when retirees saw their payments go up just 1.3%. For seniors who are used to seeing much bigger payments every January recently, receiving a raise that's under 3% could easily throw a wrench into their budget. It's time to start coming to terms with that now.
The numbers aren't out until October, but start making a plan
The official COLA announcement is not going to come until October, because COLAs are calculated by comparing how prices have changed on a consumer price index during the third quarter of the year. The Social Security Administration needs third-quarter data before it can calculate what the benefits increase will be.
Still, data from that consumer price index has been made available for the first half of the year already, so we have a large amount of information available to enable educated guesses about what the Social Security raise is going to look like, and the numbers have trended downward. In fact, in May of this year, TSCL estimated the COLA would be 2.7%, but its estimates are down now to 2.57%.
The good news is the reason for this downward trend is that inflation is slowing; prices aren't going up as much as they have been. However, while retirees may appreciate the fact that their costs aren't rising as much, they also need to adjust to the reality that the days of high COLAs could be over for a while.
There's also the troubling fact that COLAs haven't really kept pace with the inflation seniors have been experiencing, with TSCL reporting that the buying power of benefits is down 36% since 2000. Smaller COLAs may only serve to accelerate this decline.
With a lower projected raise, retirees may need to make up the shortfall elsewhere. However, it's important not to increase withdrawal rates to an unsafe level.
Retirees will need to look carefully at how much they can take from their investment accounts if their benefits bump is smaller than expected and, if necessary, should adjust their budgets so they aren't at risk of withdrawing too much and draining these accounts dry. This analysis can take time, so don't wait until 2025 to start, as the new year is closer than you think.
