I’m about five years away from 62 and wondering if my estimated Social Security benefits factor in inflation/cost of living increases? If I retire at age 62 and my benefit estimate ($1,708) is correct, I will get eight cost-of-living adjustments (COLAs) by the time I reach age 70. If we apply the historical average COLA of 3.4%, my payment would be $2,231 per month by age 70. Suppose my twin had the same exact earnings as me but he waited until 70 to file for Social Security. Would he receive $3,008 per month or would he receive an amount that was also adjusted upward from COLA increases?
– Shaun
Current Social Security estimates do not include any expected inflation adjustments that either you or your hypothetical twin (or maybe the twin is real) would receive in the future. However, you both would benefit from cost-of-living adjustments (COLAs), even if you delay your benefits. While that’s a pretty simple answer, I’ll dig in and show you some numbers just to make sure it’s clear.
And if you need additional help planning around your Social Security benefits or setting up other streams of retirement income, consider working with a financial advisor.
Cost of Living Adjustments
The Social Security cost-of-living adjustment (COLA) is an annual increase applied to Social Security benefits to account for inflation. Its purpose is to maintain the purchasing power of benefits as the cost of living rises over time. COLA is determined using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a measure of inflation published by the U.S. Bureau of Labor Statistics.
Each year, the Social Security Administration (SSA) evaluates the CPI-W data from the third quarter of the current year compared to the same period in the previous year. If there is an increase in the CPI-W, Social Security benefits are adjusted upward by the percentage of that increase. For example, if the CPI-W rises by 3%, beneficiaries receive a 3% boost in their payments.
(And if you need help accounting for COLAs in your financial plan in retirement, speak with a financial advisor and see how they can help.)
Do Future Projections Include COLAs?
Social Security statements provide an estimate of a person’s future benefits based on their work history, earnings and selected filing age. You can view these estimates by logging into your account on SSA.gov. These projections include potential benefits for each filing age between 62 and 70.
To clarify, the estimates shown reflect the current value of what you might receive if you were to file for benefits at a specific age today, based on a set of assumptions. While actual future benefits will adjust based on annual COLAs, the estimates do not account for future COLA increases.
Then again, historical COLAs are already reflected in the calculations. This means that while your current statement doesn’t predict how inflation might influence your future benefits, it incorporates past adjustments to ensure your current estimate is accurate as of today. Additionally, your projections are updated annually to reflect any new earnings, changes in assumptions and applied COLAs for the previous year.
This is important to understand so let me show you an example: As you look now, you see that your benefit at 62 would be $1,708. If next year’s COLA is 3%, your next statement would show a projected benefit of $1,759 at age 62.
All of the other benefit estimates by age would increase by 3%, as well. Of course, your estimates would all increase for other factors too, such as your earnings. However, I ignored them here to isolate how COLA affects benefit estimates.
It would be the same from your twin’s perspective. He is currently looking at a benefit of $3,008 if he delays Social Security until age 70. When he downloads his statement next year – after the SSA announces the assumed 3% COLA – his projected age 70 benefit would increase to $3,098. Of course, we are again ignoring any other factors that would also impact his estimate such as additional earnings.
(And if you need help strategizing for Social Security and building additional streams of income in retirement, match with a financial advisor and see how they can assist you.)
Bottom Line
Social Security benefit projections do not account for future COLAs, but these estimates get updated each year as COLA increases take effect. Whether you plan to claim your benefits at age 62 or delay them until age 70, the projections you see on your Social Security statement reflect how much money you would receive at a given age today.
Social Security Planning Tips
- Delaying Social Security benefits beyond full retirement age (FRA) increases your monthly payments by up to 8% annually until age 70. Advanced planning involves evaluating your health, family history and financial situation to determine whether it’s more beneficial to claim early, at FRA or delay. For married couples, coordinating benefits can maximize lifetime income – such as one spouse claiming earlier to provide liquidity while the other delays for higher survivor benefits.
- A financial advisor can help you make decisions surrounding your Social Security benefits and retirement income. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He has been compensated for this article. Some reader-submitted questions are edited for clarity or brevity.
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