Bob Powell, Editor at Retirement Daily, joins TheStreet to explain what a COLA increase means for retirees.
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00:00We're coming to that time of the year when we expect a cost-of-living adjustment to be announced.
00:04What are you expecting and how does that cost-of-living adjustment affect retirees?
00:11Yeah, so it's really interesting. So the next CPI report comes out in October and then shortly
00:16thereafter, Social Security will announce what the cost-of-living adjustment will be.
00:21It will likely be low. I'm guessing maybe around maybe three percent or so, give or take. And the
00:28idea behind the cost-of-living adjustment is that whatever your Social Security benefit was
00:32the previous year, it will be adjusted upwards by that three percent. And, you know, folks will say
00:39that three percent isn't enough to offset the cost of living. I'll still be behind the eight ball,
00:46even though there's a three percent cost-of-living adjustment. And I would say, by and large,
00:51that might be true because you're spending maybe more on food and groceries than you did in
00:56previous years. The other thing is, for many, many years, Social Security beneficiaries have
01:01benefited from the zero interest rate policy world in which, yes, COLA adjustments were low,
01:07but CPI was low as well. And so when you think about what's the effect of inflation on older
01:13adults for all these years, with the exception of maybe COVID and a couple, two years ago,
01:19you know, it's been relatively low. So even though the adjustments have been low,
01:23the inflation rate has been low. And so hopefully that hasn't hurt older adults as much. There's a
01:29CPI index that looks at the cost of living for older people, those in their 60s and 65 and older,
01:35and that shows that it's roughly equal to CPI. So it, to me, it's one of those double-edged
01:41swords. I always think of it this way. On the one hand, when you have high inflation, you have high
01:46interest rates typically, and that benefits the people who are investing in CDs and money market
01:51funds. On the other hand, when inflation is high, it also hurts people because their expenses may
01:56not be, their income may not be rising as fast as their expenses. Double-edged sword.
02:00BALLONEY. So are there any other things retirees should be doing now to get ahead of the changes
02:09in inflation and also that cost of living adjustment that you talked about?
02:13FRIEDMAN. Yeah. I mean, I think the big things that, you know, obviously, if you don't have
02:18an investment policy statement in place, you should put one in place. And that's something
02:21that evaluates what are your goals, what's your time horizon, what's your risk tolerance. And
02:26that gives you the blueprint to act no matter what's going on in the market. And so if you
02:30don't have an investment policy statement, create one. It's easy enough to do online.
02:34If you don't, can't find one online, maybe seek the help of an advisor. So step one,
02:39get an investment policy statement in place. And then the next thing I would urge people to do
02:44is to think about, especially if they're retired, have they figured out ways to manage and mitigate
02:49all the risks that they might face in retirement? We talked about inflation, and that's sort of an
02:54very insidious risk, right? It's the notion that your purchasing power will decline over time. And
02:59if you're, you know, age 65 and just beginning your 30 years of retirement, it might be that
03:05the dollar that you earn today might only be able to pay for $0.50 worth of eggs in the future.
03:11And so you need to manage that risk largely by making sure that you continue to invest in
03:15equities. On the other hand, the other big risk that you'll face in retirement is something called
03:20longevity, or the risk about living your assets. And there's no guarantee that you can use equities,
03:25investing in equities, to make sure that you don't outlive your assets. And the one thing
03:29you may want to consider is a different tool or investment to manage that risk of longevity.
03:34For some people, that might mean if they have a pension or social security, that may be enough.
03:39For other people, it might mean investing in an income annuity or a deferred income annuity,
03:44which is, in essence, an insurance product that will pay you money for the remainder of your life
03:51so that you will never run out of money. And I think those are the big things that investors and
03:55retirees need to think about is, how do I, what tools do I use to manage and mitigate the risk
04:00that I'll face in retirement? Those are big things that people need to think about and not put their
04:04head in the sand about.