Cost of Living Adjustment Social Security for 2025
Some key takeaways:
1. COLA Cost Of Living Adjustment Social Security for 2025: The COLA (Cost of Living Adjustment Social Security) in 2025 will be 2.5%.
2. Cumulative increase since 2021: The average monthly Social Security check has increased by approximately 18% cumulatively since the start of 2021, closely matching the overall inflation rate of about 19%.
3. Importance of COLA: The built-in COLA feature, the cost of living adjustment Social Security is crucial for helping retirees keep up with inflation, especially compared to fixed pensions that may not have any cost-of-living adjustments.
4. Investment strategy for retirees: To offset inflation risk, retirees should consider maintaining a portion of their portfolio in growth-oriented investments like stocks, rather than shifting entirely to conservative options like cash or fixed income.
5. Medicare premium increase: While Social Security benefits are increasing, Medicare Part B premiums will also rise to $185 per month in 2025, up from $174.70, partially offsetting the COLA increase.
Timestamps:
00:01 Cost of living adjustment Social Security 2025
02:18 Inflation impact on financial planning
03:11 Should I get conservative at retirement?
04:33 But CD rates are up, right?
06:16 Why asset allocation matters a lot
07:02 Medicare Part B
07:50 Biggest mistake when claiming social security
Cost of Living Adjustment Social Security for 2025 – Links
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Wall Street Journal article referenced
Cost of Living Adjustment Social Security for 2025 – Transcript
Cost Of Living Adjustment Social Security 2025
The Social Security Administration recently released their cost of living adjustment social security (or COLA) for 2025. Each Social Security check will be going up 2.5 percent in 2025. That’s an average increase of $49 per check or about $100 per month or about $1,200 per year.
The average monthly check is up about 18 percent cumulatively since the start of 2021. I’ve already heard from a few people who are disappointed because they got such a huge raise a year ago in their monthly checks. One person actually asked me if they did something wrong because they’re getting less.
Listen to the way they say this: “I’m getting less in my check.” No, you’re actually getting more. You just didn’t get the size bump you got last year. The amount of increase is less, but it is more.
I think 2023’s increase was around 5 percent. It’s tied to what the overall inflation rate is doing. They use a variation of the CPI measurement that is released once per month.
And yeah, like you said, it’s based on the rate of inflation. So a smaller increase actually means that inflation is less than it was at this time last year and the previous year, which is a good thing, but it also means a lower dollar increase per check.
But Casey, you raised a pretty good point that in the last three years now, the average Social Security check is up about 18 percent. I can’t remember that happening. The overall rate of inflation, if you’re looking at a cumulative basis, is up a little over 19 percent.
I just want to add that these numbers are coming from a Wall Street Journal article which we’ll link to in the show notes. Yeah, 18 percent over three years if your Social Security is one of the main buckets we talk about when it comes to retirement income.
Another main one is payments from fixed income or pensions. And a lot of those don’t even have anything similar to the cost of living adjustment social security. So the fact that Social Security has this feature built into it is great and it makes a difference over the long term, even over the short term, just over the last three or four years.
Things cost 20 percent more, but you’re also getting 20 percent more (rounded). You’re getting that increase in your payment as well. So it offsets some of that inflation we’re seeing in other areas. It’s so important to talk about when we’re doing planning for clients. We know we take it for granted that things will cost more in the future, but here we can go back over the last three years and say, see, this is a sizable jump in just the last three years.
We have to have things in place that are going to help you keep up with inflation. Getting this cost of living adjustment from your Social Security check helps, but that’s only one bucket that you may be pulling from.
You may have, like Casey mentioned, a pension. You may have investment accounts where you’re pulling money from. You need to keep up at least with the rate of inflation.
Yeah, and one of the best ways to do that is to keep a portion of your investment account invested in growthier type names, just stocks in general.
I think a lot of people want to flip the switch when they get to retirement and move to all cash or move to fixed income. They want to be fixed and have more conservative investments because they say, “Hey, I’m retired now, I don’t want to be taking all this risk.”
But you should.
You have to take risk now to offset the risk of outliving your assets in the future. This is honestly the biggest mistake or the biggest risk that we see people taking all the time. They’re like, “Okay, I’m retired. Now I should be taking less risk or I don’t want any risk.”
And there is virtually no chance you’re going to be able to keep up with inflation. Just to share some numbers here, over since February 2020 to the end of August 2024, the S\&P 500 index returned an annualized 9.9 percent, and that’s adjusted for inflation. That’s according to Morningstar.
We don’t want to bank on these types of returns over the long term because there’s gonna be some rough stretches in the market. 2022 was a tough year, but using those types of annualized returns is a little high, but it proves the point that the best way to hedge against inflation over the long term is remaining invested in the stock market.
Casey, what do you say to people when they throw back the answer, “Well, you know, a few months ago money market rates were 5 percent. Or you know, I’ve got money in a CD now that’s 5 percent. I think I’m okay because inflation is not 5 percent anymore. So I should be staying ahead of inflation, right?”
You have to talk about real returns. You have to do it. The inflation-adjusted returns, you know, if you’re getting probably closer to 4 percent now in something like a money market or a CD and inflation is, I think, 2.9 percent right now.
You’re barely breaking even there. So you have to adjust for inflation with those numbers, and those rates aren’t locked in. You know you’re gonna have to—there’s reinvestment risk. If your CD comes due in 12 months, you’re gonna have to reinvest that money in 12 months, and what are rates gonna be doing then?
Might be lower than they are today, so you’re not necessarily locking in that 4 or 5 percent over the long term. Yeah, I forget the yardstick that they use, but they talk about a real rate of return for risk-free assets. So a CD, money market, short-term investments, it’s usually somewhere between 1 and 2 percent above the rate of inflation.
Now in most cases, these are also gonna be taxable investments. So you may have some income tax to pay on these as well. So if inflation is 2 percent in the future like the Federal Reserve is aiming for, and we see CD rates or money market rates at 3 to 3.5 percent, that’s actually gonna have the numbers work out to be close to that historical average.
Yeah, I think it’s all about giving yourself as much margin of error as you can in the situation. You know, if you have a real rate or a real return of 1.5 or 2 percent when you could get a real return of 5 or 6 percent if you have a portion of your assets invested in the stock market.
I think that’s an important distinction here. We’re not saying that folks should be 100 percent long in the stock market. I think a more balanced approach, something 50-50, 70-30, where you have a nice stock-bond-cash split makes a lot of sense for retirees.
You want to have a bucket of your assets invested for the long term. To be able to access those long-term average gains of 7, 8, 9 percent a year. That’s where you’re really offsetting the inflation that your expenses are gonna incur years 17, 18, 19, 20 of retirement.
So that is something that definitely needs to be taken into account. Something else, so another wrinkle in this COLA or cost of living adjustment, which again is gonna be 2.5 percent for 2025, is that your Part B Medicare premiums are also gonna see a slight increase.
So these premiums are deducted from your Social Security checks. These premiums are gonna rise to $185 a month, which is up from $174.70. So it eats away at a little bit of that increase.
But still, I think the big takeaway here is the fact that Social Security has this cost of living adjustment social security, which is a great thing for folks, and they need to be thinking about offsetting inflation over the long term, just generally in retirement as well.
If you didn’t have this COLA, then you would just be eating this increase in Medicare premiums anyway. So it’s nice that it’s offset by the COLA increase.
Another Social Security discussion that we have with folks is when to claim.
So if you know it’s a 2.5 percent increase, if you claim early at age 62, you’re getting not your full amount. If you wait to 66 or 67, full retirement age, you’re getting your full amount. If you wait to 70, you get the most in dollar terms.
So if you apply the 2.5 percentage increase to these dollar numbers, the larger your check is, the larger the increase is gonna be. So I think that’s another feather in the cap of waiting to claim Social Security as long as you can. I think the biggest number of discussions that we have with clients is not necessarily do I take it at full retirement age versus do I wait until age 70.
The biggest number of discussions that we have with individuals is to try and get them to stop taking or stop filing at age 62. They take such a haircut by doing that.
Yeah, it’s a one-way door too. You can’t unclaim Social Security and say, “Oops, I didn’t wanna do that. I wanna wait until age 70 now.” Once you turn it on, you can’t turn it back off. So you have to be rock solid sure that that is what you wanna do.
So help making this decision. We’re having it all the time with clients here in the office. It’s very similar to the pension decision as well. It’s like you called it a one-way door. You can make this decision, but you can only make it once.
You can’t go back and change it. And so you really need to exercise some care and some thoughtful planning before plunging ahead and taking whatever option you decide to take. We’re happy to talk to folks about topics like this all the time.
Alright, I think that’s gonna do it.
Hey, was I supposed to hit this record button?
Just kidding.
