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What Are COLAs and How Do They Affect Retirement

What Are COLAs and How Do They Affect Retirement Fitzwilliams Financial

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 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 will increase your payouts.[3] You are allowed to withdraw your Social Security at 62, but you will get a permanently reduced payout.[3] This reduction in payout will 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 will 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.

 

When consumer confidence hits a multi-decade low, it is completely natural for you to feel a sense of hesitation about your hard-earned savings. If you are approaching retirement, seeing prices rise while trying to figure out the right time to adjust your portfolio can feel incredibly stressful. However, this low confidence might actually be introducing a healthy dose of critical thinking into the market right now. Instead of rushing into investments out of a fear of missing out, I am seeing people take their time to analyze their moves before they act.

This deliberate pace could be a vital asset as we prepare for what might be a historic three trillion dollar wave of tech IPOs. The names hitting the market are incredibly popular, and the media hype may make you feel like you need to change your entire strategy to get a piece of the action. But we must look closely at the underlying reality: many of these massive firms are not yet profitable. The typical corporate fundamentals simply are not there yet.

Because of this, I believe you should treat these speculative assets with extreme caution, much like money you would take to Vegas. If you want to participate, you might consider limiting that exposure to no more than five percent of a well-diversified portfolio. You should never dismantle a carefully crafted, long-term retirement plan just to follow a market trend. Furthermore, you must realize that extreme trading volumes during these public launches could cause your orders to execute at vastly different prices than you originally intended. It pays to be patient and let the dust settle.

If you have questions about how these shifting market dynamics might apply to your personal retirement plan, our team is always here to help.

Key Takeaways

  • A drop in consumer confidence may encourage a healthier investment environment by forcing individuals to rely on critical thinking instead of emotion.
  • An upcoming wave of massive technology IPOs might generate significant media hype, but these companies may lack current profitability and traditional business fundamentals.
  • Investors should avoid allocating more than five percent of a diversified portfolio to highly speculative, unproven market assets.
  • Heavy trading volume during a major public offering could cause investment orders to execute differently than an investor expects.

Fitzwilliams Wealth Management, Inc. is an SEC registered investment adviser. FWM and Fitzwilliams Financial are affiliated companies. This content is for informational purposes only and should not be construed as personalized investment advice. We do not provide tax or legal advice. Investing involves risk. Media appearances are for informational purposes only and do not constitute an endorsement.
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