As John Heywood said way back in 1546, “’Tis an ill wind that blows no one any good.” While most investors would regard an uptick in inflation as an ill wind, for recipients of Social Security benefits, the rise in consumer prices is likely to generate an increase in the cost-of-living adjustment (COLA) used to calculate Social Security payments.
According to both the Senior Citizens League and financial publisher Kiplinger, Social Security payments are likely to rise in 2022 by about 6%. This would be the largest increase in monthly benefits since 1982, and considerably more than last year’s increase of 1.3%, one of the lowest adjustments on record. The final adjustment will be announced in mid-October, once the September inflation rate is established.
SOURCE: US Social Security Administration
Increases in gasoline prices and transportation are behind much of the rise in the Consumer Price Index (CPI), which is what the government uses to establish COLAs. New cars, dining out, hotel stays, appliances, and furniture have also seen significant price inflation. It’s worth noting, however, that changes in the cost of Medicare premiums are not measured by the CPI, and for this and other reasons, many retirees believe the Social Security COLA does not accurately reflect the true changes in costs of living for those receiving Social Security benefits.
Market watchers are keeping a close eye on inflation, because rising prices for materials, services, and labor generally indicate a less profitable operating environment for the corporations that make up the major stock indexes. Also, inflation often signals an increase in interest rates, which means that companies needing to borrow funds for operations or expansion will have to pay a higher price for the privilege. The Federal Reserve, so far, has not signaled great concern over higher inflation, but lately the Fed has indicated that it will soon begin gradually closing the spigots on the money supply that it opened wide during the pandemic, in order to avoid a disastrous liquidity shortage that could have led to a longer, deeper recession. With the economy gaining steam and an attendant rise in inflation, the Fed is expected to begin pulling back from the approximately $120 billion per month in bond purchases it has been pursuing since early in 2020.
For thriving retirees, of course, the larger COLA from the Social Security Administration is mostly good news. The flip side is that if inflation continues rising, it is uncertain how long the increased benefits will keep pace with seniors’ true cost of living. It will be important for all investors, and retirees particularly, to review their portfolios in light of the likelihood of persistently higher inflation, making sure that their assets are positioned for sufficient growth to stay ahead of the increasing cost of goods and services.
At Empyrion Wealth Management, we work with thriving retirees and those who are preparing for retirement to design smart, individualized strategies that can help to provide for a secure, satisfying retirement lifestyle. Most critically, we are fiduciaries, which means that we are legally and ethically obligated to provide advice and recommendations that place our clients’ best interests before everything else. Click here to download our report, “The Fiduciary Standard and the Individual Investor,” to learn why it is critical to have a trusted advisor guiding your retirement strategy for 2022.
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