When U.S. citizens retire, they lean on Social Security benefits to enhance their financial inflow. Every year, these 70 million beneficiaries receive an increment in these payments, which is intended to align with inflation. This inflation-related increase, known as the Cost-Of-Living Adjustment (COLA), is determined annually by the Social Security Administration during the fall.
It is based on the average inflation rate for the July-September quarter. The gap between this and the previous year’s inflation dictates the COLA’s size. Given the recent stabilization of inflation rates, beneficiaries might not experience significant COLA in the near future based on current projections. However, understanding and monitoring changes in their Social Security benefits is essential for retirees.
What is the Social Security Cost-Of-Living Adjustment (COLA)?
Prices of everyday essentials like food, housing, and fuel are always in flux. For retirees who typically have a fixed income, rising costs can pose a challenge, leading to a mismatch between their expenses and their expected income from avenues like 401(k)s or pensions. Drawing more from their savings to meet escalating costs can deplete their reserves faster. Read on to grasp a better understanding of COLA, its computation, and what to anticipate in 2024.
Before the 1970s, any increase in Social Security benefits required a fresh legislative mandate from Congress. Due to the sharp inflation between 1969 and 1974, the real value of retirees’ benefits dwindled, jeopardizing their financial security. This scenario prompted Congress in 1972 to link the COLA to annual price variations of consumer goods and services as tracked by the Consumer Price Index for Wage Earners and Clerical Workers (CPI-W).
This amendment ensured that the COLA would be adjusted automatically every year from 1975 onwards. Hence, today’s retirees don’t need to rely on congressional decisions to see increases in their Social Security benefits.
What Happens If You Claim Your Social Security Benefits Early?
Certainly, you do have a degree of influence over the amount you receive from the Social Security program. The key lies i n understanding the dynamics of when and how you claim your benefits. This calculation is based on a percentage of the average wages you earned throughout your career. However, there’s a critical catch: to receive this standard benefit amount, you must initiate your Social Security payments at your full retirement age (FRA).
Determining your FRA isn’t a one-size-fits-all process; it hinges on your birth year. For those born in 1957 or later, the FRA falls between 66 and 6 months and 67 years. Nevertheless, the pivotal decision is not whether to claim benefits at FRA, but when to initiate this process.
You have the option to start receiving your first retirement check as early as 62, or you can exercise patience and delay your claim. However, if you opt for the former and choose not to wait until at least FRA, you must be prepared for a reduction in your benefit amount. The reduction is calculated at a rate of 5/9 of 1% for each of the first 36 months before FRA, followed by 5/12 of 1% for each preceding month.
| If you retire this many years early | Your Social Security monthly payments will shrink this much |
|---|---|
| 1 | 6.7% |
| 2 | 13.3% |
| 3 | 20% |
| 4 | 25% |
| 5 | 30% |