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Commentary: Preparing for the 0 percent Social Security COLA in 2016

One thing that retirees can often depend on is the fact that their Social Security checks will increase every year thanks to cost-of-living adjustments. Yet with several years of abnormally low inflation, retirees have seen low COLAs; in 2015, th...

Bruce Helmer and Peg Webb, financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings.
Bruce Helmer and Peg Webb, financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings.

One thing that retirees can often depend on is the fact that their Social Security checks will increase every year thanks to cost-of-living adjustments. Yet with several years of abnormally low inflation, retirees have seen low COLAs; in 2015, the COLA was a mere 1.7 percent - about $20 more every month for the average beneficiary.

The news is even worse for 2016 as there will be no COLA. This may come as a bit of a surprise, especially when you consider that Medicare trustees project that 30 percent of Medicare beneficiaries could see their premiums increase by as much as 52 percent next year (final numbers for 2016 haven't been released at the time of writing).

How is it that retirees can see both a large spike in their Medicare premiums and their Social Security benefits remaining constant? The answer is based on how Social Security calculates the annual COLA. Social Security uses the Consumer Price Index for Urban Wage Earners and Clerical Workers, an index that does a poor job reflecting how important health care costs are for retirees. So while you may be seeing a big increase in your medical payments next year, low inflation elsewhere in the economy will depress any increases in your Social Security benefits.

For retirees who are already receiving and relying upon Social Security, there's likely little planning that can be done just a couple of months before the end of the year. For others who haven't yet begun claiming their Social Security benefits, this news should underscore the importance of having a comprehensive financial plan that allows you to acquire retirement income from multiple sources.

To better prepare for the possibility of a year with a low or zero COLA in the future, here are a couple of things for you to reflect on in regards to your financial plan.

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• How reliant on Social Security will I be? We touched on this earlier, but it's worth repeating: Your retirement income plan should be diversified with multiple income sources. We talk about the three-legged stool - Social Security, personal savings and income from a part-time job - when discussing retirement income. Strive to put away as much as you can in an IRA or 401k that you can use to fill any gaps in your budget. For those who are currently enrolled in Social Security and need more income, consider picking up a part-time job.

• When will I claim Social Security? Many people instinctively know that the longer they put off claiming their Social Security benefits, the greater their benefits will be. Some people may have to claim benefits at a younger age for financial reasons, but others may have flexibility when choosing when to claim their benefits. It's a prudent idea to speak with a financial advisor who can run the numbers to help you calculate what is likely to be the optimal time to begin receiving your benefits.

A 0 percent COLA has, unfortunately, become a bit of a recurring theme for retirees in recent years - 2010 and 2011 also had no COLA. Constructing a comprehensive financial plan is the best way to be ready for the inevitable roadblocks affecting your stream of retirement income.

Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of "Your Money" on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com .

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