COLAs are designed to help retirees keep pace with inflation, but they’re not guaranteed. Rather than count on money that may never come, here’s what I’m doing instead.
Social Security recipients and some pension recipients are eligible for one cost-of-living adjustment (COLA) annually. The Social Security Administration (SSA) turns to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to determine the amount of a COLA. Specifically, it looks to see how much the CPI-W increased between the third quarter of the prior year and the third quarter of the current year.
COLA increases aren’t typically large enough to blow your hair back, but they can be helpful. For example, this year, benefits were raised by 2.5%. Although COLAs are designed to help retirees keep pace with inflation, I’ve never factored a COLA into our expected income. The primary reason is that COLAs are not guaranteed.
The idea of counting on non-guaranteed money gives me the willies, so I’ve devised another way to make the most of any increases that come our way. It’s quite simple and will require very little time to implement.
Image source: Getty Images.
Looking to the future
I plan never to retire, but my husband does. Years of travel and stress have convinced him that there’s more to life, and he’s looking forward to the day when he can do whatever strikes his fancy. As much as I respect his feelings, I’ll admit to getting a little nervous whenever I consider what it will be like to live without his paycheck. And after spending so many years saving and investing for retirement, I feel queasy whenever I think about drawing down our retirement accounts.
I’ve lived through enough recessions to know that 401(k)s, IRAs, and other investment accounts can take a beating when the market is in the tank, and have come to peace with the ups and downs. My newfound confidence is mainly due to historical evidence showing that investors who continued to invest during the last 16 recessions experienced positive returns 75% of the time. Those investors willing to stomach unstable markets averaged an annualized market return of 8.8% for the two years following the start of the recession.
Investing our COLAs
What concerns me is investing less than I’m used to. Due to several major upheavals in our lives, we’ve had to start over several times, and now that we’re on a roll, it’s going to be hard to slow down dramatically. Since I plan to continue working, I’ll still add to my Solo 401(k), but my husband’s contributions to his account will come to an end. Rather than putting money into his account, we’re going to have to take money out, which bugs me.
I’ve read all the articles telling me how much we “should” have in our retirement accounts when we retire, but the part of me that can’t see the future (in other words, 100% of me) tends to worry that we’ll never have enough. At this point, it’s illogical because I’ve run the numbers about 1,000 times, but it certainly helps me understand how 51% of respondents in a Northwest Mutual study said they suspect they’ll outlive their savings.
In an effort to alleviate my apprehension, I’m planning for a future without COLAs. When they do come along, they’re going into an IRA where the money can grow. I realize I won’t get everything just right. My goal is to do my best and hope to make good use of COLAs as they come our way.
