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Why inflation matters to Social Security, Medicare, and your 401 (k) – Forbes Advisor

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Despite assurances from the Federal Reserve that it won’t last, high inflation has become one of the dominant stories of 2021.

U.S. retirees living on fixed incomes are struggling with rising prices, but those who are still working tend to fear inflation more. One of the reasons for this is that retirees benefit from an annual cost of living adjustment (COLA) to their social security checks. More inflation means that a bigger COLAbenefits will increase by 5.9% in 2022, for example, the biggest boost since 1982.

Still, inflation has many drawbacks for retirees, such as the more expensive Medicare B premiums. Meanwhile, the Fed is eager to ease bond purchases before they finally raise rates. interest in the years to come, which will likely have a negative impact on retirement investments.

The real question for retirees is whether this [COLA] The increase will be enough to offset the rising costs of goods, or will it just soften the blow, said Tim Steffen, director of tax planning at Baird.

Inflation and social security COLA

More … than 64 million beneficiaries of Social Security will get higher benefits next year, according to the Social Security Administration, with the estimated average monthly benefit for retirees rising from $ 1,657 to $ 1,565 in 2021. A typical retired couple who both receive benefits will now receive $ 2,753 compared to $ 2,599 this year.

The indexing of benefits to inflation aims to protect the purchasing power of retirees over time, said Chantel Boyens, senior policy associate at the Urban Institute. If you tried to buy it from the market, it would be very expensive.

This is not the first time that a major Social Security COLA has followed a difficult year. The 2009 COLA was 5.8%, for example, even as the Great Recession still generated mass unemployment and financial havoc.

Why do these big gains go hand in hand with economic crises, you might ask? This is the data used to determine the COLA, namely the consumer price index for urban and office workers (CPI-W).

This gauge, said Social Security Administration chief actuary Stephen Goss, is heavily influenced by gasoline prices. You will recall that a gallon of gasoline exceeded $ 4 in 2008, according to data from the United States Energy Information Administration (EIA). Meanwhile, gas prices soared to over $ 3.27 in September 2021 as social distancing mandates were relaxed, people drove more, and supply chain disruptions impacted supply.

While retirees certainly had reason to be happy with the COLA’s big hike in 2009, they were probably less than happy when there was no adjustment in 2010 or 2011, as gasoline costs went up. stagnated or shrunk, but the economy continued to struggle.

While no one can predict the future, today’s seniors shouldn’t expect 2022-style hikes to become the new normal.

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Medicare B inflation and premiums

Some of the additional Social Security COLA money may also be absorbed into Medicare Part B premiums.

For those who sign up, Medicare Part B covers outpatient services and doctor visits. Premiums are automatically deducted from monthly Social Security benefit checks, and it is predicted that costs for most retirees could increase by about $ 10, compared to $ 148.50 per month currently for those with incomes below $ 176,000.

It is important to remember that each person’s Social Security benefits vary depending on when they first applied for benefits and how much they have earned throughout their life. It is possible that the total amount of your benefit is actually lower than that of the typical beneficiary because you are starting from a lower base.

A small number of people may actually see their Medicare B premiums increase more than what they would receive from their COLA. In these cases, Medicare uses what’s called a disclaimer, which ensures that your Social Security check won’t go down if you meet certain basic eligibility requirements.

Inflation and retirement savings

One of the bizarre results of the Covid recession is that investment portfolios have become gangbusters. It is widely believed that the Fed’s stance on easy money has greatly benefited the stock market in recent years.

Average account balances at Vanguard, for example, jumped 21% in 2020 mainly thanks to an 18% increase in inventory.

The party may be over, however.

Fed Chairman Jerome Powell said the central bank had made substantial progress towards its goal of achieving inflation slightly above its 2% target for some time. More recently, he hinted that the labor market has also almost hit that threshold, meaning the Fed may soon cut its $ 120 billion in monthly bond purchases.

As the Fed prepares to lift its emergency measures and start dealing with stubbornly high inflation, stocks and your retirement savings may face more headwinds.

While this is a necessary step to return to a more normal central bank policy stance, it can lead to choppy markets or even a market correction over the next few months. That’s why it’s a good idea for retirees to have about a year or more of spending saved in cash: you don’t want to have to sell in a bear market to get the money you need so badly.

Do you want to plan for your retirement?

Use Personal Capital’s retirement planner to calculate how much you should be saving for your retirement

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