It's Not the Problem They Say It Is

Personal Money Planning |

By Gary Silverman, CFP®

Recently I read several headlines that read something like this: Large Social Security Cost-of-Living Adjustment Will Be Negated by Inflation. The articles in question then went on about how disappointing it is that the raise probably won’t result in any additional spending power for seniors.

O. K. A. Y.

Perhaps some of these reporters need to understand just what a cost-of-living adjustment is. Most readers know that it costs money to live your lives as you are. It is not news that generally, these costs go up each year. That’s pretty much the definition of inflation.

If your paycheck does not change but your costs go up, you are losing purchasing power—what a dollar will buy you. The Social Security Administration knows this and knows that they are the “paycheck” for retired folks. Each year they look at how much things cost now compared to the previous year and adjust the payout accordingly. That is known as a cost-of-living adjustment.

This adjustment is only a “raise” insomuch as the increased amount of the check. It is not a raise in the idea that the recipient’s lifestyle will improve because of it. They’re just supposed to break even. This is why the “problem” brought up in the articles is not a problem. It’s the whole purpose of the thing.

That doesn’t mean seniors won’t actually have a problem. Some will, some won’t. As should also be no surprise, not every senior spends the same. Some take cruises, others don’t. Some have high prescription drug costs; others aren’t on any mediation. Some like steak, others are vegetarian.

Any cost-of-living adjustment done the same way for everyone on Social Security will not be enough for some to maintain their standard of living. Other seniors will be able to increase theirs. There have always been arguments about how to make the inflation adjustments more accurate to the realities that seniors face, but there will never be one that gets rid of inequities across the spectrum of senior lifestyles.

Uh-oh, I’m done with my rant and still need to fill some space. So… let’s talk about next week’s article. It’s the start of one of my little series, this one on how to overcome sequence of return risks. For many, Social Security, even with its cost-of-living adjustments, won’t maintain the lifestyle they had become accustomed to in their working years. So, they invest and then use those investments to supplement their Social Security income (and pension if they have one).

It’s pretty easy to figure out how much additional spending you can do given a certain lump of investments you have when you retire…sort of.  The problem is if you retire just before the start of a bull-market you could spend a lot more than if you retire just before a recession. And since you are usually not told if either of those circumstances will happen next, it is a problem indeed.

We’ll start looking at how to take this into account next week. See you then!


Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.