It's risky to retire solely on Social Security. That's because most seniors require twice as much money to maintain a comfortable lifestyle as compared to younger people, and those benefits will only replace about 40% of the typical worker's pre-retirement income.
However, a number of people actually do end up retiring primarily or entirely on Social Security. And it seems likely that the same individuals will be most affected by Social Security benefit increases.
A cost-of-living adjustment, or COLA, based on inflation rates is applied to benefits each year. Since this year's inflation rate has been extremely high, benefits are probably going to rise significantly by 2023. But it's debatable whether that's actually a good thing.
This year, Social Security recipients saw their benefits increase by 5.9%. The last time benefits rose more than 5.9% was back in the early 1980s. As such, next year's raise could be the largest one seniors get in 40 years.
It's too early to predict exactly how the COLA will look in 2023. This is due to the fact that the raise's viability will depend on CPI data for urban wage earners and clerical workers from the third quarter (CPI-W). A complete set of third-quarter statistics isn't yet available because it's still September, and it won't be until practically mid-October when the Social Security Administration will reveal next year's COLA.
But based on the data so far, it's fair to assume that next year's COLA will well outpace the 5.9% seniors got this year. Estimates have ranged from roughly 8.5% to almost 11%, so even if the final number falls somewhere in the middle, you can bank on it being large.
But that's not necessarily a good thing. After all, the only reason 2023's COLA will be so high is that inflation is high. And because the CPI-W doesn't necessarily account for the expenses that are the most applicable to seniors, there's a good chance Social Security beneficiaries will end up losing buying power in 2023, even if their monthly payments end up increasing a lot.
Inflation has been crushing consumers of all age groups -- but it's dealt a particularly tough blow to retirees on a fixed income. For current seniors who get most or all of their income from Social Security, there may not be much to do about rampant inflation other than try to adjust spending habits and look into part-time work.
But for current workers looking to avoid a similar fate in retirement, the solution boils down to saving aggressively to have extra income available later in life. Socking away $300 a month in a retirement plan over a 30-year period could result in a nest egg worth about $408,000 if that money is invested at an average annual 8% return, which is a bit below the stock market's average.
Seniors today who have savings to tap are probably faring much better than those who are limited to a Social Security paycheck. And that will likely continue to hold true regardless of what 2023's COLA amounts to.