Following the record-setting 8.7% Social Security cost-of-living adjustment (COLA) in 2023, retired baby boomers should brace themselves for a considerable reduction, with the 2024 COLA expected to be just 3.2%. This decline is attributed to a decrease in inflation rates. Nonetheless, certain essential expenses like food, housing, and fuel have experienced inflation rates higher than the average, posing a potential strain on your budget.
Moreover, certain proposals aimed at addressing the funding shortfall in the program have suggested implementing diverse cuts to Social Security. One such measure involves altering the calculations for the Cost-of-Living Adjustment (COLA), potentially leading to diminished future increases. Without adequate preparation for these potential adjustments, there is a risk of overestimating your forthcoming Social Security income, leaving you with inadequate alternative resources. Here are five strategies to mitigate the impact of a reduced COLA on your retirement budget.
Strategies for Baby Boomers to prepare for potential Social Security reductions
Trimming down your living expenses is a proactive measure to ready yourself for reduced COLAs and extend the reach of your Social Security benefits. Begin scrutinizing your budget to identify high-impact expenses, enabling you to make targeted cuts.
Consider downsizing your residence or forgoing a second car to make substantial reductions in your monthly expenditures. Implement smaller adjustments such as opting for used items, adopting more frugal grocery shopping habits, monitoring your utility consumption, and exploring cost-effective insurance plans. Additionally, explore senior discounts and assistance programs as potential aids in managing your expenses.
With the possibility of reduced COLAs on the horizon, it’s crucial to evaluate any debt obligations consuming your retirement income. This becomes even more significant as inflation drives up the costs of daily essentials, and elevated interest rates add to the burden of borrowing.
Vanguard suggests prioritizing high-interest debts, such as credit cards, student loans, and personal loans. Develop a customized payoff strategy aligned with your financial circumstances. Although addressing debt may temporarily constrict your budget, it will ultimately mitigate total interest charges and establish a more substantial cushion for future expenses.
Unforeseen expenses may arise unexpectedly, and navigating them becomes more challenging when your reliance is on limited Social Security benefits. Thus, maintaining readily available cash reserves is pivotal to prevent hardship and the potential accumulation of new debt.
In anticipation of reduced COLAs, ensure you have a minimum of three to six times your fundamental monthly expenses saved, preferably in a high-yield savings account. If feasible, contemplate saving an entire year’s worth of basic monthly expenses to enhance your peace of mind further.
Exploring investments provides an avenue for generating passive income to offset the impact of a reduced COLA. In addition to your existing 401(k) or individual retirement account, consider incorporating new elements such as bonds, dividend-paying stocks, annuities, or a rental property. Each option operates uniquely, presenting different levels of risk and return, necessitating a discussion with a financial advisor for tailored guidance.
For instance, government bonds offer relatively modest returns but boast a high level of safety. Conversely, dividend-paying stocks may yield potentially higher returns but come with increased risk. Annuities, available in various forms, provide steady payments with lower risk but may incur higher costs. On the flip side, owning a rental property entails responsibilities and diverse risks.
If you are already receiving Social Security benefits, engaging in part-time employment can mitigate the impact of a reduced COLA. Explore local opportunities as well as remote positions and freelance work for increased flexibility. However, be mindful of the potential impact on your Social Security benefits, as the new income might lead to a reduction in benefits or render some of it taxable.
Conversely, if you are contemplating applying for Social Security, you might consider postponing that decision and continuing to work. For instance, delaying your application until reaching the full retirement age of 66 to 67, rather than applying at age 62, won’t directly affect COLAs but can help you avoid a reduction in benefits due to early retirement.