Social Security COLA’s Could Have Big Impact on Advisers’ Retirement Planning

Advisers discuss the cost-of-living adjustment and what it could mean for pre- and post-retirees.

By DJ Shaw



The Social Security Administration last week announced beneficiaries will get an 8.7% increase in their benefits in 2023, the highest increase in 40 years. This averages out to an increase of more than $140 per month.

The news comes as the Bureau of Labor Statistics has announced the Consumer Price Index increased 0.4% for the month of September, as inflation continues to pressure the economy. Over the last 12 months, inflation increased 8.2%.

As financial advisers take in this news, Mike Lynch, managing director of applied insights at Hartford Funds, says it’s important to note that while this year’s increase was dramatic, there are no guarantees that there will be one every year. But it is a telling sign that the government recognizes the fact that prices are going up and seniors are an important group that needs protection.

Retirees shouldn’t count on future increases being as large as 2022 or 2023 given that Social Security is basing the cost-of-living adjustments based on overall inflation, says Katherine Tierney, senior retirement strategist at Edward Jones. The increases could be exacerbated by “some unusual factors,” including pandemic-related spending, supply shortages and Russia’s invasion of Ukraine. Once those issues subside, future adjustments could be smaller.

“The day and age of just living on Social Security or being very, very conservative [are over],” Lynch says. “You’ve got to sit down with your tax professional, your financial professional, and really come up with a game plan that’s going to allow you to have the retirement that you’ve dreamed up and the retirement that you’ve enjoyed.”

For now, the increase will likely help retirees better meet their day-to-day needs, Tierney says. But whether it’s enough will vary from person to person and depend on several factors, including the impacts of inflation.

Planning for an increase in Social Security can be a little different, depending on whether an adviser’s client is pre-retirement or in retirement, Tierney says. It’s important for advisers to understand the benefits and when its best for their clients to claim them to meet their retirement income needs.

For those approaching retirement, Tierney recommends clients consider their spouse, understand life expectancy and how long they will remain an employee to help determine their income needs and guide their retirement planning conversations. Lynch suggests they do everything they can to stay on top of their investments and take opportunities to reduce excessive spending.

Clients thinking about the role of work have to consider that the “day and age of 65, 67 as that hard and fast finish line” has probably been pushed out now, Lynch says. Working longer may not necessarily be a decision made from a financial perspective. More people are working remotely and continuing to work past retirement age may now not be as hard as it was in the past.

Understanding how long a client plans to work will have an impact on retirement planning conversations, Lynch says. Benefits increase each year they are delayed; when advisers understand the dollar amount their clients need, it can help better inform their decision on the client’s best retirement age.

During retirement, Tierney suggests that advisers and their clients review their spending strategy at least annually, and now might be a good time to revisit this with an increase coming next year.

“Just take another look at where their finances are today. What [is] their total income coming in? Where’s their spending going? Do they have potential gaps that they need to figure out how to meet or potentially reduce spending?” Tierney says. “The other important part we encourage that they do is look at how much they’re withdrawing from their investment portfolio to meet their spending needs.”

Depending on an individual’s financial situation, Tierney says the increase in Social Security could potentially help them pull less money out from their investment portfolio, which can be beneficial in a down market.

“How much you’re withdrawing from your investment portfolio each year plays probably the biggest role in determining whether your money’s [going to] last you for retirement,” Tierney says. “So even small adjustments, like reducing your withdrawals in down markets can have a really meaningful impact on your portfolio’s longevity.”

Through the Inflation Reduction Act, seniors will also see their Medicare Part B premiums decrease to $164.90 in 2023, a decrease of $5.20 from 2022, according to Centers for Medicare and Medicaid Services.

Tierney says seeing both an increase to Social Security benefits and the decrease in Part B premiums in the same year “is pretty unusual.” It can be considered a benefit, though the size of its impact may only be modest.

“More often than not, when we get a cost-of-living adjustment, it’s partially offset by Medicare Part B premiums since those are automatically deducted from Social Security checks,” Tierney says. “This is going to be an unusual year in that they’re going to get the COLA and they’re also going to get a decrease in their Part B premiums … they won’t lose part of that cost-of-living adjustment like in prior years.”

«