What Does the Social Security COLA Mean for You?

Last month, Social Security announced a much-anticipated cost of living adjustment (COLA) for beneficiaries. After analyzing numbers from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), the Administration approved a 2.8 percent bump in monthly beneficiary checks.

For the average retiree receiving Social Security benefits of $1,422 monthly, this amounts to a 39-dollar increase. Of course, that figure will vary depending upon one’s actual benefit amount. Those receiving spousal benefits will also see an increase in their checks.

While those numbers might seem a small difference, this is actually the largest COLA we’ve seen in recent years. Retirees are often pleased to hear the news of a benefits increase, since individual costs of living sometimes rise even during years when the inflation rate appears flat.

Of course, any change in retirement income can trigger a domino effect of consequences. Some retirees do pay taxes on a part of their Social Security benefits, depending upon something called “combined income”. Combined income refers to the total of Social Security benefits, adjusted gross income for the year, and non-taxable interest. When combined income tops certain thresholds, part of Social Security benefits are taxed.

Those thresholds are:

• Individual taxpayer, whose combined income falls between $25,000 and $34,000.
• Married filing jointly, and combined income falls between $32,000 and $44,000

Those who fall within the above income ranges can owe taxes on up to half of their Social Security benefits.

And, you might owe taxes on up to 85 percent of Social Security benefits, if you fall into the following income ranges:

• Individual taxpayer whose combined income is more than $34,000
• Married filing jointly and combined income is more than $44,000

In other words, a COLA is great news, but an increase in benefit payments can trigger other undesirable consequences. This issue illustrates why working with an experienced financial planner is so important not only before retirement, but on an ongoing basis afterward. There are ways to adjust your income slightly, so that additional taxes might not be triggered during COLA years. So remember, consult with us before retirement, and then check in regularly if you have any concerns.