People who are retired can now get ready for the official announcement of the Cost-of-Living Adjustment (COLA) for 2025 to their Social Security benefits.
This rise will be added to monthly payments by the Social Security Administration (SSA) starting January 3, 2025.
This COLA increase is especially important because for Americans aged 66 and up, Social Security makes up about 30% of their income.
15% of women and 12% of men aged 65 and up depend on it for 90% or more of their income. For many, it is their only source of income.
What is the 2025 COLA Increase?
The SSA has said that the COLA will go up by 2.5% in 2025. The average annual COLA over the last 20 years has been 2.6%, so this change fits with a pattern of small increases over the last few years.
To give you an idea of how big this is, here are the COLA changes from the last few years:
- 2023:Â 8.7%
- 2024:Â 3.2%
- 2025:Â 2.5%
This change helps retirees keep up with inflation, but it has not caused a lot of excitement, especially since the COLA increases in the last few years have been so different.
The 2.5% raise may not seem like much, but it is a big part of retirees’ financial security. The Motley Fool’s most recent poll shows that 54% of retirees think the change is not enough, and 31% say it is “completely insufficient.”
At the end of September 2024, the average monthly Social Security benefit was $1,922. That is more than $23,000 a year. This amount will go up by $577, or 2.5%, bringing the total to $23,641 per year, or an extra $48 per month.
A Need for a More Accurate Inflation Measure
The 2025 COLA may not have gotten much attention in part because of how it was calculated. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is what the COLA is based on right now.
This index mostly shows how much the working class spends. But for a lot of retirees, especially those 65 and older, medical costs make up a big part of their budget.
The Consumer Price Index for the Elderly (CPI-E) may give a more accurate picture of how seniors spend their money, which could lead to a better COLA in the future.
Planning Beyond Social Security: Diversifying Retirement Income
Even though Social Security is still a big part of retirement income, people who are retired need to plan for other ways to make sure they have enough money.
A successful career can lead to bigger Social Security checks, but they probably will not be enough to cover all of your needs in retirement. Setting up multiple sources of income is therefore essential for a comfortable retirement. Take a look at these strategies:
- Part-time work before full retirement
- Social Security benefits
- Stock dividend income
- Rental income from properties you own
- Pension plans or other retirement income from previous employers
- Selling stocks from your portfolio if necessary
- Interest income from bonds, CDs, or savings accounts
- Inheritance
In addition to these traditional income streams, retirees may explore alternative sources of revenue, such as:
- Cashing out life insurance policies
- Securing a reverse mortgage
- Renting out part of their property
You can also get a lot more money by putting off retirement for even just a few years. This is because you can save more and get higher Social Security payments.
The Bottom Line: Plan Now for a Secure Future
It is not likely that your Social Security benefits will cover all of your retirement costs. Planning ahead, saving a lot, and having a lot of different sources of income are the keys to being financially secure in retirement.
With the right plans, retirees can have a comfortable, self-sufficient retirement without having to rely on Social Security alone.
