Recently, while answering some listener questions about early retirement, I pointed out that every piece of your financial plan is connected to every other piece. Adjust one lever, and you might trigger some unexpected consequences if you're not working with a professional who can help you anticipate and prepare for further changes.
We're certainly seeing those same kinds of interconnected effects with concerns about inflation. Even as our economy continues to accelerate out of the pandemic, massive government stimulus combined with ongoing supply chain disruptions and low labor participation have driven up the consumer price index (CPI) this summer. That's affecting how many seniors are thinking about their household spending and retirement timelines. But, as we discuss on today's show, inflation is also affecting how the government is looking at Social Security.
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1. The recession ended when?
First some good news: we've exited the COVID-19 economic recession. You probably guessed that now that businesses are reopening, and travel is booming. But can you guess WHEN the pandemic recession ended?
April of 2020.
Yes, you read that correctly, April 2020, not 2021! The two-month 2020 recession was the shortest on record.
That might seem counterintuitive when you think back on how isolated we all were last spring. But by the start of summer 2020 we'd already learned a lot about how to do business safely during the pandemic. Restaurants had pivoted to carry out and outside dining. Companies had figured out how to manage employees who were working from home. And after bottoming out in April 2020, the economy has been growing steadily ever since, although we've yet to eclipse our pre-pandemic highs.
If that information makes you feel like you missed something, well, we've talked in the past about how the media prefers negative headlines to positive ones. I also like to remind folks that "the economy" is never going to announce, "Hey, everything is fine now, it's a great time to invest." Whether it's the pandemic, the 2008 recession, or the next big crisis that will dominate your social media feed, people who successfully build wealth over time are able to tune out the short-term noise and keep their eyes on the big picture: their long term retirement plan.
2. Inflating your COLA.
If you look through our resources on Social Security, we talk quite a bit about managing retirees' expectations about their benefits. Yes, it's usually best to delay taking Social Security and maximize your monthly payments. But even then, Social Security alone probably isn't going to support a modern, longer, active retirement. That's why I think it's good that the Social Security Administration has started sending statements to folks that break down exactly how much money they'll be entitled to depending on when they start taking their benefits.
Of course, when I say we need to manage expectations, that doesn't mean Social Security isn't an important part of your retirement plan. In fact, due to inflation, the annual cost of living adjustment (COLA) for beneficiaries in 2022 could be over 5%, the highest in almost a decade. That's a reasonable amount of money to help new retirees find their footing, to help spouses manage the retirement transition if one is still working, or to pad savings.
3. The big question about Social Security.
Some folks in Washington want Social Security to provide a bit of an extra cushion for seniors. The Fair COLA for Seniors Act of 2021 proposes using the Consumer Price Index for the Elderly (CPI-E) to calculate COLA rather than the standard CPI we've all been monitoring in the news lately. Based on historical data, that could push up COLA adjustments by an extra percentage point or so every year.
Which would, in turn, increase how much the government spends on Social Security benefits every year.
Which raises an age-old question that's gained some greater relevance in this inflationary environment: is Social Security going to go bankrupt?
In our view, that's not likely. If Social Security was ever in immediate danger, the government would experiment with things like raising the retirement age, raising the payroll tax, or capping benefits before letting the program go bust.
We'll have to wait until October to see what the final COLA adjustment will be for next year. And the Fair COLA Act might have trouble gaining any traction with all the other proposals working their way through Congress right now.
But whatever changes are in store for Social Security, Keen Wealth clients know that we're always available to answer any questions and chart the best course forward for you.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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