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Social Security Is Failing Seniors. Do This so It Doesn’t Wreck Your Retirement.

This year, Social Security recipients got what was hailed as a very generous 8.7% cost-of-living adjustment, or COLA. Since inflation has cooled off steadily month after month in 2023, it might be reasonable to say that Social Security recipients are faring pretty well, based on their most recent raise. While this year’s COLA may have helped seniors regain some buying power, it’s not enough to compensate for 23 years of lost buying power.

Social Security is letting seniors down

Between January 2000 and February 2023, Social Security COLAs raised seniors’ benefits by 78%, averaging out to a yearly increase of 3.4%, according to the nonpartisan Senior Citizens League. But the cost of goods and services has risen at a much faster clip than that.

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It’s estimated that during that same time period, the cost of goods and services purchased by the typical senior rose 141.4%. That’s an average increase of 6.2% a year.

All told, seniors on Social Security have lost 36% of their buying power since the year 2000. It’s worth noting that 2023 was the first year in a while where buying power improved. Last year’s data pointed to a 40% loss of buying power since 2000.

Still, a massive loss of buying power is just that and can’t be sugarcoated. Even if adjustments are made to the way Social Security raises are calculated, it would take a massive overhaul to compensate for the immense financial hit seniors on Social Security have taken over the past two decades and change.

Hopefully, the more these staggering numbers are put in front of lawmakers, the more likely we’ll be to see changes to the way COLAs are calculated. But for now, this information should serve as a wake-up call to current workers to do what they can to save for retirement independently and be less reliant on Social Security later in life.

Make up for that shortfall

One big misconception about Social Security is that it’s supposed to replace workers’ pre-retirement earnings in full. In reality, it will replace about 40% of wages for an average earner.

Most seniors need more income than that to live comfortably. So between that minimal replacement income and problematic COLAs, it makes the case to build up a nest egg to avoid financial struggles. The good news, though, is that you don’t have to part with an unreasonably large chunk of your income to amass a solid amount of savings for retirement.

Let’s imagine you earn $80,000 a year, and you’re able to set aside 10% of that, or $8,000 annually, in an IRA or 401(k) over 25 years. That’s right — we’re going to assume that you don’t start saving for retirement until you’re well into your career because you spent your earlier working years paying off educational debt and saving for a home.

Now let’s assume your investments in your IRA or 401(k) generate an average yearly 8% return, which is a bit below the stock market’s average. All told, you’d be looking at $585,000 in retirement savings.

That could make it so you’re not nearly as reliant on Social Security. It could also allow you to retain your buying power as a senior, even if inflation surges and no changes are made to the formula behind Social Security COLAs.

Don’t set yourself up for failure

Retiring on Social Security alone could be disastrous, even if positive COLA changes come down the pike. If you want to avoid a financial crunch later in life, do your part to build up your savings.

Don’t worry if you’re midway through your career and haven’t started. As you can see from the example above, even if you’re first beginning to save in your 40s, there’s still plenty of time to build up a nice IRA or 401(k) balance.

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