Social Security’s COLA keeps the bulk of retirement income up to date with inflation.
As inflation has gained traction in the last year, commentators constantly remark about how it is particularly hard on retirees who live on a “fixed income.” Please stop! Retirees do not live on fixed incomes. The 60 percent of households in the lower portion of the income distribution receive the bulk of their retirement income from Social Security (see Table 1). Social Security adjusts benefits each year to reflect changes in the Consumer Price Index.
The automatic increase in monthly benefits in response to inflation is a wonderful aspect of the Social Security program. It ensures that retirees do not lose purchasing power as inflation rises. The most recent adjustment increased monthly benefits by 5.9 percent. Since the cost-of-living adjustment (COLA) first affects benefits paid after January 1, Social Security needs to have figures available before the end of the year, and thus uses inflation numbers from the third quarter of the preceding two years to calculate the adjustment. That is, the adjustment for January 1, 2022 is based on the increase in the CPI from the third quarter of 2020 to the third quarter of 2021.
I guess one could complain that the 2022 COLA is only 5.9 percent, when the CPI-W – the index used for adjusting Social Security benefits – increased by 7.8 percent year over year in December. But once inflation stabilizes, the COLA will keep pace with rising prices, and once inflation starts to decline, the lag in the adjustment will keep the COLA higher than the inflation rate. In short, over an entire inflation episode, Social Security COLA increases will fully compensate for inflation.
Ah! Some might say, wouldn’t it be better to use a price index that more accurately measures the spending pattern of retirees? Indeed, older people do spend more on health care than their younger counterparts. But the difference in the inflation rates between the two indexes is small and has declined over time. Indeed, the CPI-E – the index for the “elderly” – is currently rising less rapidly than the CPI-W (see Figure 2).
The bottom line is that retirees in the United States do not live on a “fixed income.” For most households, Social Security benefits are their main source of retirement income, and these benefits are adjusted annually for changes in the cost of living. And the annual adjustments do a really good job of offsetting the effects of inflation.
The bottom line is that retirees in the United States do not live on a “fixed income.” For most households, Social Security benefits are their main source of retirement income, and these benefits are adjusted annually for changes in the cost of living.
Living on a fixed income generally applies to older adults who are no longer working and collecting a regular paycheck. Instead, they depend mostly or entirely on fixed payments from sources such as Social Security, pensions, and/or retirement savings.
Your Social Security payments may go up (or down) for cost of living adjustments, but once you start Social Security, your monthly payments are fixed. Pensions are like Social Security and are also considered to be fixed income.
A plurality of older Americans, 40.2 percent, only receive income from Social Security in retirement. Roughly equal numbers of older Americans receive income from defined benefit pensions as from defined contribution plans.
Source: Social Security Administration. Table by author. Across all ages, the average benefit is less than $2,000 per month. While that may be enough for some people to live comfortably, most retirees will need more than that to cover all their expenses.
By age 40, you should have accumulated three times your current income for retirement. By retirement age, it should be 10 to 12 times your income at that time to be reasonably confident that you'll have enough funds. Seamless transition — roughly 80% of your pre-retirement income.
Using our portfolio of $400,000 and the 4% withdrawal rate, you could withdraw $16,000 annually from your retirement accounts and expect your money to last for at least 30 years. If, say, your Social Security checks are $2,000 monthly, you'd have a combined annual income in retirement of $40,000.
Assuming you want to withdraw 4% of your retirement assets each year, to be able to live off of $60,000 a year, you would need to have $1.5 million in retirement savings. This means you would need to put away $3,125 a month for 40 years – assuming, again, that you didn't actually invest it.
Take your estimated monthly expenses (be sure they're realistic) and divide that number by 4% to figure out how much income you'll need in retirement. You'll need $1.25 million ($50,000 ÷ 0.04) going into retirement if you estimate that you'll need $50,000 a year to live comfortably.
The median income for Americans 65 and older is $50,290. The mean (average) is $75,020. Average annual expenditures for Americans 65 and older are $57,818. The average Social Security retirement benefit check is $1,907 as of January 2024.
Social Security offers a monthly benefit check to many kinds of recipients. As of December 2023, the average check is $1,767.03, according to the Social Security Administration – but that amount can differ drastically depending on the type of recipient. In fact, retirees typically make more than the overall average.
Having several streams of income can help you achieve greater financial stability in retirement. They might include a pension from a former employer, income from your retirement accounts and other investments, Social Security benefits, and possibly a paycheck from part- or full-time work.
Your maximum benefit if you file at full retirement age – between 66 and 67 – is $3,822 per month. Your maximum benefit if you file at age 70 – the age when extra benefits stop accruing – is $4,873 per month.
Once you start taking social security, it is a fixed amount, so in that sense it is fixed income. But, a fixed income security pays out a set level of cash flows to investors, typically in the form of fixed interest or dividends, until a preset maturity date.
Mainly, as a retiree, you likely receive income from multiple sources, including Social Security, one or more individual retirement accounts (IRAs), possibly a pension, and an investment account or two. When you are employed, you generally receive a regular paycheck, such as every two weeks.
A fixed income trader is the most common fixed-income career. Much like any other trader, a fixed income trader makes trades for clients, either institutional or retail. Fixed-income traders typically work for either broker-dealers or banks.
Market downturns and recessions are never easy to stomach, but they can be particularly tough for retirees. When you're relying on your savings to pay the bills and those savings suddenly take a hit, it can be nerve-wracking. If a recession is on the horizon, the stock market could have further to fall.
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