New data recently released has revealed that the 2025 cost-of-living adjustment for Social Security could be the lowest it has been since 2021.
Figures from the nonprofit The Senior Citizens League (TSCL) estimate the cost-of-living adjustment (COLA) will be 2.57%. This is in relation to the 2.9% increase recorded in July by the consumer price index (CPI) over the past 12 months.
The Social Security Administration, or SSA, typically finalizes the following year’s COLA in October, so these figures are not yet confirmed. In comparison, Social Security recipients received a 5.9% increase for 2022 and an 8.7% for 2023.
How the COLA is calculated
The SSA calculates the annual increase using a figure known as the CPI-W: Consumer Price Index for Urban Wage Earners and Clerical Workers. This tracks the average spending by American workers through the cost of goods and services over time.
They calculate the average inflation rate using the CPI-W during the third quarter, or July to September. If inflation is higher than the previous year, COLA is adjusted by the difference.
However, older Americans have different spending habits than average Americans. For example, they are more likely to have higher costs related to health care than younger Americans. Because of this, some people oppose using the CPI-W to determine the COLA increase.
Why this is significant
According to a survey by TSCL, more than three-quarters of seniors reported an increase in their monthly budget for essentials like housing, food, and medicine. In the same survey, 63% fear their retirement income won’t be enough to cover these rising costs.
Social Security benefits have seen their purchasing power decline by over 30% since 2000.
The estimate from TSCL suggests this could mean an approximate $49 monthly increase in benefits, based on the current average of around $1,900 received.
How to prepare for unknowns in retirement
While Social Security recipients – both current and future – can’t change the rate of inflation or the COLA, those saving for retirement can better prepare themselves for retirement in other ways.
Start now
It’s never too late – or early – to start saving for retirement. The sooner you begin planning and taking action, the more time your investments have to grow. This will better position you to handle potential financial challenges that might come your way.
Whenever you begin, you give yourself the advantage of time, allowing your savings to accumulate and providing a cushion for your retirement years.
Maximize contributions
One of the most effective ways to secure your financial future is by maximizing your contributions to retirement accounts, such as a 401(k) or IRA. If your employer offers a matching contribution, make sure you’re contributing enough to take advantage of it.
Even small increases in your contributions can significantly impact your retirement savings over time.
Diversify your retirement portfolio
While traditional investments like stocks and mutual funds are important in a retirement account, consider branching out into alternative assets such as real estate, precious metals, or private equity.
A well-diversified portfolio can help balance the ups and downs of the market, giving you a more stable financial foundation as you approach retirement.
Take action today
Although inflation has slowed somewhat, prices are at record highs, and it’s more important than ever to take proactive steps to secure your financial future. You can help set yourself up for a more secure future by maximizing retirement savings.
By taking these actions today, you’ll be better equipped to navigate the uncertainties ahead and ensure that your retirement years are financially stable and secure.
