If you are currently receiving Social Security or you are considering how Social Security might factor into your retirement plan, it’s important for you to understand what COLA stands for. You may have seen the acronym in various information about Social Security, and you may have wondered what it meant. Well, let’s answer your questions about the term.
What is a COLA?
COLA stands for “cost of living adjustment.”[1] It’s an automatic increase in the payout of Social Security benefits that is meant to counter inflation. [1] The amount Social Security is increased by is based on the CPI-W, which stands for the “consumer price index for urban wage earners and clerical workers.”[2] Essentially, the CPI-W is calculated using the prices for common goods that people purchase in their everyday lives, such as food, clothing, medical care, recreation, and other common purchases.[2] It’s a way for the government to track the increase in the general cost of living for most people.
How Do COLAs Work?
So, in a nutshell, the COLA is a way that your Social Security will be adjusted automatically to potentially increase based on the current price of goods on the market.
One of the more important things to consider when it comes to your retirement and the COLA is that the longer you wait to receive your benefits, the more the COLA may increase your payouts.[3] You are allowed to withdraw your Social Security at 62, but you may get a permanently reduced payout.[3] This reduction in payout may cause the COLA increases in your payments to be less than if you had waited to claim your social security at your full retirement age.[3]
Here’s an example to illustrate this point:
If you receive $10,000 yearly in Social Security benefits at full retirement age, an 8% COLA increase will cause you to receive an additional $800 a year for the rest of your life. If you claim your Social Security early and you get $7,000 in Social Security, an 8% COLA increase will cause you to gain an additional $560 a year for the rest of your life. So, claiming early can not only decrease your initial payouts, but it may also decrease your COLA adjustments as well.
Retirement has a lot of rules and different elements that it can be important to know. If you are looking for a guide to help you navigate your retirement planning, consider reaching out to one of our professionals today for a complimentary review of your finances.
[1]https://www.investopedia.com/terms/c/cpi-w.asp
[2]https://www.investopedia.com/terms/c/cola.asp
[3] https://www.investopedia.com/retirement/when-take-social-security-complete-guide/#:~:text=The%20minimum%20age%20to%20claim,size%20of%20your%20monthly%20benefit.
Because investor situations and objectives vary this information is not intended to indicate that an investment is appropriate for or is being recommended to any individual investor.
This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance.
Content regarding social security is not associated with or endorsed by the Social Security Administration or any other government agency.
Maximizing your Social Security Benefits assumes foreknowledge of your date of death. If as an example you wait to claim a higher monthly benefit amount but predecease your average life expectancy, it would have been better to claim your benefits at an earlier age with reduced benefits.
Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated.
The hypothetical example is for illustration purposes only. Individual results may vary.
Advisory services offered through Asset Strategy Advisors, LLC (ASA). Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Insurance offered through Asset Strategy Financial Group, Inc. (ASFG). ASFG and ASA are independent of CIS.
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