Goodbye 2024, Hello 2025 Understanding the Latest COLA Changes

Sophia Hayes

Goodbye 2024, Hello 2025 Understanding the Latest COLA Changes

Retirees can now prepare for the official announcement of the 2025 Cost-of-Living Adjustment (COLA) to their Social Security benefits. The Social Security Administration (SSA) is set to incorporate this increase into monthly payments starting January 3rd, 2025. This COLA increase is particularly significant as Social Security accounts for approximately 30% of income for Americans aged 66 and older. For many, it is a lifeline, with 15% of women and 12% of men aged 65 and above depending on it for 90% or more of their income.

What is the 2025 COLA Increase?

The SSA has announced a 2.5% COLA increase for 2025. This change follows a pattern of moderate increases over recent years, with the average annual COLA over the last two decades being 2.6%. To put this in perspective, here are the COLA adjustments for the past few years:

  • 2023: 8.7%
  • 2024: 3.2%
  • 2025: 2.5%

Although this adjustment helps retirees keep pace with inflation, it hasn’t generated much excitement, especially given the disparity between the COLA increases in recent years. While the 2.5% raise might seem modest, it represents a vital component of retirees’ financial stability. The most recent survey by the Motley Fool reveals that 54% of retirees find the adjustment inadequate, with 31% calling it “completely insufficient.”

The average monthly Social Security benefit as of September 2024 stands at $1,922, which adds up to over $23,000 annually. With the 2.5% increase, this amount will rise by $577, bringing the annual total to $23,641—an additional $48 per month.

A Need for a More Accurate Inflation Measure

The underwhelming response to the 2025 COLA may be partly due to the way it’s calculated. Currently, the COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which primarily tracks the expenses of the working class. However, for many retirees, especially those aged 65 and above, medical costs are a significant portion of their expenses. The Consumer Price Index for the Elderly (CPI-E) might provide a more accurate reflection of seniors’ spending habits and could lead to a more beneficial COLA in the future.

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Planning Beyond Social Security: Diversifying Retirement Income

Although Social Security remains an important source of income, retirees must plan for financial security beyond these benefits. While higher Social Security checks can result from a successful career, they are unlikely to cover all retirement needs. Therefore, establishing multiple income streams is critical for a comfortable retirement. Here are some strategies to consider:

  1. Part-time work before full retirement
  2. Social Security benefits
  3. Stock dividend income
  4. Rental income from properties you own
  5. Pension plans or other retirement income from previous employers
  6. Selling stocks from your portfolio if necessary
  7. Interest income from bonds, CDs, or savings accounts
  8. Inheritance

In addition to these traditional income streams, retirees may explore alternative sources of revenue, such as:

  • Cashing out life insurance policies
  • Securing a reverse mortgage
  • Renting out part of their property

Delaying retirement by even a few years can also provide a significant boost to disposable income, as it allows for additional savings and higher Social Security payments.

The Bottom Line: Plan Now for a Secure Future

Social Security benefits alone are unlikely to cover all of your retirement expenses. The key to financial security in retirement lies in planning, saving aggressively, and diversifying your income streams. With the right strategies in place, retirees can enjoy a comfortable, self-sufficient retirement without relying solely on Social Security benefits.

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