Not a day goes by that we don’t hear something about inflation. From a five-dollar gallon of gas to a five-dollar gallon of milk, inflation is impacting virtually everything we buy. It has gotten severe enough that the federal government has addressed it with legislation, the Inflation Reduction Act.
But while all the headlines seem to concentrate on the negative effects of inflation, there are actually some positive effects, including the effect of inflation on retirees, in particular on retirees who depend on fixed income investments to fund their retirement years. With the recent spike in inflation and the Federal Reserve raising interest rates in an attempt to curb it, bonds and CDs have hit rates unseen in quite some time. This might not help immediately, amid a soaring cost of living, but high inflation is not a constant. The Federal Reserve will do whatever it takes to get it under control. If retirees can lock in the higher rates on fixed income investments for longer periods they will benefit over the long term.
Where I am seeing the most substantial benefits of high inflation is for retirees on fixed income programs with cost of living adjustments: those on pensions that increase payments based on the increase in the Consumer Price Index (CPI), but even more broadly, the more than 65 million Americans who receive Social Security benefits. A large portion of our country’s retirees rely on Social Security income in retirement and an increase like the one for 2023, a whopping 8.7 percent, will make a significant difference in many peoples’ lives.
Of course, the increased Social Security payments are due to the increase in the cost of living. But consider what we saw as oil retreated from its intraday high of $125.19 a barrel in August to a late-September contract of $88.62 a barrel, a retracement of nearly 30 percent. Timber corrected 68 percent from its high in May of 2021. So, considering current estimates, retirees will be receiving their 8.7 percent raise right about the time goods are returning to more reasonable prices. And although the prices of goods will decline, the higher monthly retirement checks from Social Security will continue. (There is a calculation that would allow the raise to normalize over time.)
Which leads to the issue of delaying taking social security in order to reap the benefits of a 6 to 8 percent step-up. Are those who wait losing out on these record inflation increases? I have spent most of my career advising clients on their Social Security strategies, and in most cases, given a normal life expectancy, it has made the most sense to wait and allow the 6 to 8 percent step-ups to accumulate, thus guaranteeing a higher income that cannot be outlived. Waiting also provides some tax-advantaged moves: making additional Roth conversions at lower tax brackets, or realizing capital gains prior to required minimum distributions. But given this double-digit inflation adjustment, does that plan still make sense? Yes.
According to the Social Security Administration (SSA), “You are eligible for annual cost-of-living benefit increases starting with the year you turn 62.” They go on to say, “This is true even if you don’t file for benefits until your full retirement age or even age 70.” The SSA increases a retiree’s benefit beginning with the year they turn 62, and those benefits are increased annually to reflect the increases.
Social Security retirement benefits are based on an individual’s average lifetime earnings. The SSA runs a calculation using a person’s 35 highest earning years, then indexes those earnings to account for changes in the average wages since each of those years. Even though you postpone your benefits, you are not missing out on those increases. You can enjoy the 8 percent step-up at age 70 as well as benefit from the recent record levels of cost-of-living increases.
Inflation and its impact on Social Security payments is one more reason to consider your entire financial picture before making significant financial decisions. Working with a Certified Financial Planner can help you to a holistic view of your finances and make the most of your financial life.
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