Make the most of Social Security COLA increase

 An old couple having breakfast

If you’ve been receiving Social Security, you probably recall that you got a sizable “raise” in 2022. But in 2023, the cost-of-living adjustment (COLA) is even sweeter for retirees – your monthly benefits will be 8.7% bigger, the largest COLA in 40 years. What’s behind this jump? And how can you take advantage of it?

By definition, inflation is the cause of this large COLA. To arrive at a figure, the the Social Security Administration (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 increase in your monthly benefits with your first Social Security payment in 2023. What’s more – Medicare Part B premiums are declining next year, to $164.90/month from $170.10/month, which will provide an additional modest increase to Social Security checks for those enrolled in Part B since the premiums are automatically deducted. How much of a difference the new amount makes in your life will depend on your overall financial situation. But regardless of your situation, you might want to consider how you could use the extra money.

Here are a few suggestions:

  • Help pay for increased spending. If you need the increase to pay for expenses, use it. After all, prices have jumped quite a bit this past year, and that’s why this increase came about.
  • Reduce your portfolio withdrawals. This year’s big bump in Social Security may enable you to reduce the withdrawals you’re taking from your investment portfolio, which can be especially beneficial in down markets. Your withdrawal rate, or the percentage of your portfolio you withdraw each year, plays the biggest role in ensuring your money lasts through retirement. And small adjustments, such as reducing your withdrawals during down markets, can have a meaningful impact on your portfolio’s longevity.
  • Build your cash reserves. During your retirement years, it’s generally a good idea to have about a year’s worth of income needed from your portfolio in cash. You should also maintain an emergency fund containing several months’ worth of living expenses, with the money kept in a liquid account. Your increased Social Security checks may enable you to contribute to your cash reserves for these needs.
  • Give to others. If you feel your personal finances are already in good shape, you might decide to use your extra Social Security money to help others in some way. And it’s possible that your gifts may bring you some tax advantages, in addition to the satisfaction you’ll receive from helping others. For example, you may be eligible for a state tax deduction on contributions made to a tax-advantaged 529 education savings plan for your grandchildren, or you may be able to receive a deduction for contributions to charity. (Contributions to a 529 plan may be state tax-deductible or eligible for a state tax credit in certain states for taxpayers. Because tax issues for 529 plans can be complex, please consult your tax advisor.)

While the COLA for 2023 is certainly welcome, you probably shouldn’t count on future increases being nearly as large as this year’s. The recent spike in inflation was exacerbated by a confluence of unusual factors, including pandemic-related government spending, supply shortages and the Russian invasion of Ukraine. As these issues work themselves out, we would expect inflation to subside, leading to smaller COLA bumps. And that means that any measures you take in response to the 2023 COLA increase may need to be reviewed next year.

But for now, you may want to contact your financial advisor to see how any of the ideas mentioned above might be included in your comprehensive financial strategy. A large increase in your retirement income is a rare event – and one that you’ll want to use to your full advantage.