- The 2023 cost-of-living adjustment (COLA) of 8.7% for Social Security benefits represents the largest increase in 40 years, offering some much-needed relief for millions of retirees. What's more – monthly 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.
- This boost in benefits can help retirees better meet their day-to-day needs given rising inflation. It may even enable them to reduce how much they need to withdraw from their investment portfolio, which can be especially beneficial in down markets. How much you withdraw from your investment portfolio 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.
- Social Security recipients could also put those extra dollars toward their cash reserves. We generally recommend retirees maintain about one year's worth of spending needed from their investment portfolio in cash, and up to three months' spending in an emergency fund. We recommend that another three to five years' worth of spending needed from their investment portfolio be held in short-term fixed-income investments, which are now offering better income opportunities given multiple interest rate hikes.
- In addition to the COLA, Social Security also made its annual adjustments in other items for 2023, including the maximum taxable earnings amount ($160,200), and the earnings limit for retirees who file before reaching full retirement age ($21,240 for years before reaching full retirement age, $56,520 for the year a retiree reaches full retirement age).
- While the COLA for 2023 is certainly welcome, retirees probably shouldn't count on future increases being nearly as large as this year’s, because Social Security bases the COLA on the overall rate of inflation (namely the CPI-W index). 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 in the future.
The above chart provides the annual cost-of-living adjustments (COLA) for Social Security from 1975 through 2022. The highest annual COLA during this time period was 14.3% and the lowest was 0%.