Social Security Benefits: How the 2023 COLA Could Affect You
Annual cost-of-living adjustments can impact your retirement plans. Learn how to calculate and plan for 2023’s update.
You don’t need to read the headlines to feel the impact of inflation. From everyday goods to long-term investments, inflation is playing a pivotal role in financial decision-making. The sentiment goes double for those in or entering retirement. Living on a fixed income as prices soar to all-time highs can pose a challenge to making ends meet.
Luckily, Social Security benefits are not stagnant, and the system has factors in place to keep up with rising costs.
Cost-of-Living Adjustments, Explained
Cost-of-living adjustments, or COLAs, are annual increases in Social Security benefits. You can begin to claim a reduced portion of your Social Security benefits as early as age 62 and claim full benefits at your full retirement age, which depends on the year you were born. Delaying until after your full retirement age will increase your monthly benefit amount.
Get answers to five common Social Security questions.
Without COLAs, retirees increasingly lose buying power each year and may struggle to balance their budgets on a fixed income in the face of inflation and other rising costs. These adjustments help offset inflation year over year so that retired Americans can still afford day-to-day expenses.
COLAs have been in effect since 1972, when legislation was enacted to make these adjustments automatic, meaning they occur annually without legislation or government intervention. COLAs are calculated each year based on the Consumer Price Index for Urban Wage Earners and Clerical Workers from the previous year’s third quarter to the current year’s third quarter. However, if there is no increase in the Consumer Price Index, there is no COLA.
How Are Social Security Benefits and COLA Changing in 2023?
The Social Security Administration has announced some changes to Social Security and COLA in 2023. The 2023 COLA for Social Security benefits will increase by 8.7%. This is compared to a 5.9% increase in 2022.
Most Social Security beneficiaries will see this change starting with their January 2023 payments.
How much will your payments increase? Refer to your My Social Security account. If you don’t have an account with My Social Security, you will receive a letter by mail before the end of the year informing you of your increase.
How Could COLAs Impact Your Finances?
COLA is meant to soften the blow of inflation. In a year of record inflation and unpredictable markets, increasing Social Security benefits is a welcome change that could help those on a limited income.
The COLA means bigger benefits for retirees, and it could also impact:
Social Security taxes. Almost half of all U.S. retirees will owe taxes on their Social Security income. The increase in Social Security benefits may come with increased taxes owed at the end of the year.
Investments. After a less-than-stellar year in the markets, you may dread drawing down on retirement investments. With the latest adjustment, you may be able to delay selling investments and make ends meet until you feel comfortable selling.
Retirement plans. If you’re nearing retirement, use the latest COLA in Social Security benefits to help assess your budget and spending in retirement.
Annual cost-of-living adjustments are expected. But, in a year where inflation is straining many retirees’ fixed incomes, 2023’s 8.7% increase is a welcome change. The COLA increase could help retirees better live on a fixed income while combating the rising price of goods.
COLAs can help, but it’s just a slice of the pie regarding retirement planning and budgeting. If you’re seeking more help, consider reaching out to a financial planner for personalized guidance.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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