In January 2009, Social Security recipients received their biggest raise since 1982 as the result of a 5.8% cost of living adjustment (COLA). In light of the higher price of food and oil, chances are you had already done some belt-tightening, and the increase simply provided a little needed relief. By the way, the annual Social Security COLA announcement is a good time to review your spending needs and make sure all the other components of your retirement income plan are properly positioned. Given the fact portfolio values have likely dropped it may be difficult for retirees to stick with the traditional 4% rule, which calls for annual increases in retirement account withdrawals to match the inflation rate. Most plans are based on a 3% projection of inflation, so increasing the withdrawal by 5% or more at a time when portfolios are down in value may not be prudent.
Social Security may represent only a fraction of your retirement income, but this year's COLA raise can help take some of the sting out of the dismal news reflected on your retirement account statements.
Keep in mind that inflation affects the Social Security benefits of people who haven't retired yet. Their eventual benefits are rising even though they haven't started collecting yet. Here's how it works. Each year the "bend points" used to calculate the primary insurance amount (PIA) (the retirement benefit you receive) are increased based on the rise in the average wage index. (Historically, wages have increased faster than prices, averaging about 4% a year.) In the year a worker turns 62, his PIA is calculated based on the bend points in effect for that year (which in turn are based on the wage index two years prior, when the worker was 60). In other words those who are currently receiving Social Security benefits and those who expect to receive them in the future will all benefit from this year’s large COLA increase.
In previous years, the COLA announcement has been offset somewhat by a substantial increase in Medicare Part B premiums. A good chunk of what Social Security gave us, Medicare took away, since Part B premiums are deducted from retirees' Social Security checks. But this year the Centers for Medicare and Medicaid Services (CMS) announced that Medicare premiums stayed flat at $96.40 per month if modified adjusted gross income is under $85,000 for individuals or $170,000 for married couples.
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Jerod C. Fenton CFP® RFC