Your Social Security Checks Are About To Get Fatter And The Retirement Readiness Questions You Need to Ask Yourself Today
A few weeks back, I talked about the Social Security Trust Fund and how we're expecting a significant benefits reduction thirteen years from now if changes are not made.
In a follow-up episode, I hinted at the idea that Social Security is considering a cost of living adjustment that would be one of the highest recorded in modern history.
Well, the number has been dropped, and this past Wednesday, the Social Security Administration has decided to increase monthly benefits to all Social Security recipients by 5.9% starting in 2022. You heard me right, 5.9% beginning in 2022.
Social Security is going up but not by the hundreds you may expect or need.
This increase in Social Security is the highest recorded since 1982 and is a substantial increase from last year's number, only 1.3%. In fact, over the past decade, the average increase in benefits was only 1.65%.
The fact remains that Social Security, realistically, has never risen enough to keep up with inflation. The average retiree was always facing higher grocery bills and healthcare costs, but the increase in Social Security was only nominal compared to their other expenditures.
So what can the average retiree expect with this 5.9% increase? Approximately $92 more a month is what they can expect. It doesn't sound like much to me.
While Social Security benefits cover approximately 70 million Americans monthly, the principal complaint among retirees is that the dollar amount is often not enough. In fact, according to a nonpartisan senior group, The Senior Citizens League, housing costs have risen 118% over the past twenty-one years, while healthcare costs have increased by 145% over that same period. Social Security? A 55% increase only!
Unfortunately, about 40% of retirees live from Social Security check to Social Security check. While a 5.9% increase in benefits may seem to be significant, it isn't going to be getting anyone to a better financial situation, nor does it mean they'll have some cash they can pocket away each month.
Yet, policymakers have refused to acknowledge that inflation even existed for many years. I mean, let's take a look at how long it took to get the country moving on minimum wage finally. For years, we have been stuck in the low teens and certain parts of the country, single-digit minimum salary. Frankly, it wasn't until just a few years ago that many parts of the country started pushing towards paying employees $15 an hour, and now here we are rapidly driving the ceiling even further.
Wages are increasing but not at the rate of overall consumer staples and essentials like housing.
For instance, Amazon is at $18/hour, and Bank of America, higher, at $21 an hour and plans to push to $25 by the year 2025.
Inflation on consumer staples such as groceries and rising health care costs are already expected to increase proportionally. COVID has had a significant impact on this as we are impacted by a global supply chain shortage and a shortage in labor. Staples like meat, poultry, eggs, and fish increased by 10.5%
Energy prices are seeing their sharpest increase, with the average price for a gallon of gas now at $3.29, up from $3.17 a month ago and $2.18 a year prior. Compared to a year ago, that is a 50% increase in cost for a gallon of gas.
Like the certainty of time passing, we can expect rising costs in consumer staples.
While this COLA adjustment from Social Security is a welcome relief and a beacon of light during these dark days, the fact of the matter is that the increase is still not enough.
However, we must remember that Social Security was never designed to be enough. Social Security was created as a stop-gap relief for Americans who were living their senior years in poverty. It is intended to provide supplemental income for those who are retired.
The keyword is supplemental. Social Security should not have been and never should be considered as your retirement plan's chief component. It should only be supplementary to what you have already saved. From a number's perspective, Social Security benefits alone are challenging to cover all expenditures for the average retiree. This is even worse off for individuals who took Social Security at the earliest age of 62, locking themselves into a benefit reduction of almost 25%.
So what actions could a person take if Social Security is not enough? Well, I urge individuals to take an in-depth look at their retirement numbers and strongly consider whether it will be enough. I mean, it is time to take off the blinders. And I mean quite literally!
There are many individuals that I come across who are getting close to retirement, without any clue whether or not they have saved enough for retirement. Most of them know that Medicare is at age 65, FRA for Social Security is age 67, and they contribute to their 401k.
Many of them do not know how they are invested, nor do they understand how the account has done in the past five years, nor any idea of where it will be when they get to retirement age.
And I get it! Our industry was never designed to make this information readily available. The technology could not even provide people with accurate return information until just this past eight to ten years, but not knowing doesn't mean that it's okay to continue trucking on forward blindly.
If you're young, then time is on your side, but that time must be used in a way that makes the most sense, and that means taking an honest hard look at the financials and having someone run projections for you on what it can be. If you don't like the number, then at least you know you can do something about it. Why would you rather wait until you're just about ready to pull the retirement trigger to find out that, oh crap, the numbers aren't looking good, and you're going to have to make a whole lot of sacrifices to get it to work.
Doing this is not difficult if you're working with a trusted financial advisor who has access to technology. Suppose you have all of the information you need, such as your retirement savings balances. In that case, you can quickly get your retirement probability ratio hammered out in a forty-five-minute power planning session. If you're not working with a financial advisor and you need a guide on how to do this, then be sure to check out my episode "How to Calculate Whether You Have Enough Saved for Retirement." In this episode, I take you through my entire planning process on figuring out whether you have saved enough money or whether you're on track to hit your retirement goal. I'll leave a link in the show notes, so if you haven't listened to it yet, be sure to check it out.
If you want to retire someday, which I sincerely hope all of you do, I recommend you have a serious reality check on what your financial situation looks like. I implore you to crack open a bottle of wine and answer the following questions with your significant other:
At what age do each of us want to retire?
If that age doesn't work, how much longer are we both willing to work?
What does retirement look like? Is our home going to be paid off? Are we going to be traveling? If yes, how often and how far?
How much have we saved for retirement thus far?
How much are we contributing to our retirement accounts, and how have those accounts been performing?
Does our current financial situation allow us to save more for retirement?
If we are not saving or saving enough, what are the roadblocks limiting us from saving for retirement? Are we trying to pay off debt? If yes, then when are we projected to pay off that debt? Or perhaps we just haven't ever committed to a savings plan, and we are spending every dollar we make; if that's the case, then maybe we need to look at building a budget.
Now, these are just some starter questions. I use these with every part of my initial planning sessions to build a framework around the individual or couple. Still, as the conversation progresses, more questions will come up, as you will find if you undergo this conversation with your significant other or even by yourself.
One of the biggest secrets to becoming financially independent, hey, that's an intended pun, and if you don't get it, you must check out my book. But anyway, one of the biggest secrets is to take the blinders off and understand where you are in your financial life. We tend to get into a comfort zone of whatever is working for us and forget to build a roadmap. Without a roadmap, the destination of retirement is relatively unknown. Unless you're pretty comfortable with the probability that you could potentially drive off a cliff, I urge you to build a roadmap.
As I record this, it's the middle of October of 2021. The COVID virus, which surfaced in December of 2019, is still something we are battling as a global nation. In a blink of an eye, it'll be two years, and who would have thought that time would fly this fast? I certainly didn't.
If these past two years have flown quickly, know the next two will fly by just as fast. Please do not tell yourself that you can do this another day or that next month will be a better time to have this conversation. The one reality that is always consistent is that we will age, and we will be one step closer to retirement each year. This also means we have one year less to positively impact what retirement looks like.
So I urge you, real change starts today. As we close up the year, think about the questions I asked and put some thoughts down on what your retirement outlook is like. The fact is, there's no one out there that's going to care about your retirement. Not your bosses, not your friends, not your family, and certainly not the government. Everyone will undergo it someday, yet nobody will ever ask you how you're doing, so do yourself a favor and ask those questions yourself.
Until next time, I wish you and your family the very best.