Retirees in the United States will see an increase in their Social Security payments due to the cost of living adjustment. Learn the specifics and how they will affect your finances. The new year brings good news to retirees in the United States.
Starting in January 2025, Social Security payments will increase by 2.5%, which will help, albeit slightly, to alleviate the strain on wallets in the face of inflation.
On average, beneficiaries will receive $50 more per month. It may not seem like much, but each dollar counts, right?
What is COLA and why is it so important in social security payment?
This is where the COLA (Cost of Living Adjustment) comes into play. This mechanism adjusts Social Security payments to keep up with rising prices. It’s like moving up a rung to match daily expenses, which also rise, albeit not always at the same rate.
How is it calculated? Simple in theory. It is based on the CPI-W, or Consumer Price Index for Urban Wage Earners and Clerical Workers. Every year, the third quarter is analyzed to determine how much benefits will increase. And this year’s inflation has made 2.5% the key figure for 2025.
How much more will you receive?
Let’s get practical and talk about numbers. The current average monthly payment for a retiree is $1,907. With the COLA increase, this figure will rise to approximately $1,954. It’s not a fortune, but it’s a small comfort.
What about retired couples? They will also notice an increase. In their case, the monthly average will increase to $3,089. This amount is intended to partially offset the effect of inflation on daily expenses.
Changes in the full retirement age
However, it is not only about increases. In addition, the full retirement age will change in 2025. For those born in 1960 or later, the full retirement age is 67.
If you retire earlier, say at age 62, your benefits will be permanently reduced. This reduction could be up to 30%, resulting in a significant loss for those who choose to retire early.
This leads to the question many people ask: is it worth retiring early? It will depend on your personal circumstances, but it’s something worth thinking carefully about.
Watch out for taxes
Now for an important point that may go unnoticed. While you will receive more money, this may affect how much you pay in taxes. Depending on your total income, some of your Social Security payments may be subject to federal taxes.
What’s the recommendation? Contact a financial advisor. This will help you understand how, while the increase is positive, it may affect your tax situation. You don’t want any surprises when filing your taxes, do you?
Help that comes at a crucial time
In conclusion, this 2.5% increase is good news for retirees in an environment where everything, from food to basic services, appears to be rising in price. Of course, some experts believe it is insufficient to fully cover the increase in the cost of living. At the very least, it’s a positive step.
Meanwhile, the most important thing is to remain informed. Understanding how these changes will affect your finances and planning accordingly can make all the difference. Because, at the end of the day, every change in benefits affects the lives of millions of people.
