Receiving Social Security benefits? You’re getting a “raise.” And not a small one, either. The Social Security Administration (SSA) has issued a 5.9% cost-of-living adjustment (COLA) for 2022, the largest COLA in nearly 40 years.

By definition, inflation is the cause of this large COLA. To arrive at a figure, the SSA uses a formula based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

You’ll notice the almost six percent increase in your monthly benefits with your first Social Security payment this year. How much of a difference the new amount makes in your life will depend on your overall financial situation. The increase could not only help offset the rise in inflation but also reduce the amount you may need to take from your investment portfolio and retirement accounts, such as your IRA.

That said, you probably should not count on future COLA increases being nearly as large as this year’s. The recent spike in inflation was largely caused by a confluence of unusual factors, including greater consumer demand following the reopening of several sectors of the economy, disruption in the global supply chain, and increased government spending for pandemic relief efforts. As these issues work themselves out, it’s quite possible that inflation will subside, leading to the smaller COLA bumps we’ve seen in recent years.

In any case, though, you have this year’s COLA increase. Of course, you might need it to help pay for the higher costs of goods and services. But if your cash flow is already reasonably strong, you could use the extra money to help build cash reserves for your paycheck in retirement – a retirement spending account funded by a variety of sources, including Social Security, payments from pensions or annuities, stock dividends, interest payments and so on. The more robust your retirement paycheck, the less likely it becomes that you’ll be forced to dip into your emergency fund or long-term investments to help pay for your regular costs of living.

If you feel your personal finances are already in good shape, you might decide to use your extra Social Security money to help your loved ones in some way, perhaps by contributing to a tax-advantaged 529 education savings plan for your grandchildren.

Not yet retired? Watch for these Social Security changes

If you’re already retired and collecting Social Security, you’ll be most interested in the 5.9% COLA increase. But if you’ve yet to fully retire and haven’t started taking your Social Security benefits, or if you’re still working at least part time but also receiving Social Security, you’ll want to be aware of some changes going into effect this year:

  • Full retirement age adjusts again – Individuals born in 1960 reach age 62 in 2022. At 62, you can begin collecting Social Security, but your monthly checks will be much smaller than if you waited until your full retirement age (FRA), when you can collect 100% of your benefits. The FRA for those born in 1960 or later is 67, which is two months older than the FRA of 66 years and ten months for those born in 1959. (You can exceed the 100% figure if you wait beyond your FRA to begin collecting Social Security, although payments “max out” when you reach 70.)
  • Earnings limit increases – If you’re still working, but you’ve started collecting Social Security before your FRA, your benefits will be reduced if you exceed certain income limits. In 2022, you can earn up to $19,560 – up from $18,960 in 2021 – before one benefit dollar is withheld for every $2 earned above the limit. And in the year in which you turn your full retirement age, you can earn up to $51,960 – up from $50,520 in 2021 – before $1 is withheld for every $3 in excess earnings. Once you reach your FRA, you can earn as much as you want without your Social Security benefits being withheld (although your benefits could still be taxed).

It’s always nice when you get an unexpected change, such as this COLA escalation, to improve your finances or help your family – so review how this change could affect your situation.