Make the most of the 2024 Social Security COLA increase

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If you receive Social Security, you likely recall the 8.7% boost in benefits last year as part of the 2023 cost-of-living adjustment (COLA) increase.

Starting in 2024, your monthly benefits will be 3.2% higher, above the 20-year average of 2.6% — though not as large as in 2023, in part due to the cooling of inflation. As of September 2023, the average monthly Social Security benefit sits at $1,794.

To somewhat balance the higher-than-average COLA increase, Medicare Part B premiums are increasing in 2024, from $164.90/month to $174.70/month, modestly decreasing Social Security checks for those enrolled in Part B since the premiums are automatically deducted. How much of a difference the new amount makes will depend on your unique financial situation.

Although a noticeably smaller bump this year, this increase in benefits can help retirees better meet their day-to-day needs while inflation continues to be above the longer-term target.  

Here are a few suggestions: 

  • Offset higher expenses. If you need the increase to pay for expenses, use it. After all, inflation is still an issue and the key reason for the increase.
  • Reduce your portfolio withdrawals. This year’s Social Security increase may enable you to reduce the withdrawals you’re taking from your investment portfolio. Your withdrawal rate, or the percentage of your portfolio you withdraw each year, plays the biggest role in ensuring your money lasts through retirement. And small adjustments, such as reducing your withdrawals during down markets, can have a meaningful impact on your portfolio’s longevity. 
  • Build your cash reserves. During your retirement years, it’s generally a good idea to have about a year’s worth of living expenses from your portfolio in cash. You should also maintain an emergency fund containing an additional three to six months’ worth of expenses, with the money kept in a readily accessible account. 
  • Give to others. If you feel your personal finances are already in good shape, you might decide to use your extra Social Security money to help others in some way. It’s also possible that your gifts may bring you some tax advantages. For example, you may be eligible for a state tax deduction on contributions made to a tax-advantaged 529 education savings plan for your grandchildren, or you may be able to receive a deduction for contributions to charity. (Charitable giving and tax issues for 529 plans can be complex. Please consult a qualified tax professional to determine the potential impact to your taxes.)

While the 2024 COLA increase is certainly welcome, you probably shouldn’t count on future increases to be nearly as large as they have been in recent years. Inflation was exacerbated by a confluence of unique factors, including pandemic-related government spending and supply chain disruptions in part due to conflicts abroad. As inflation subsides, you can expect lower COLA increases, or, in some cases, no increases at all (as was the case in 2010, 2011 and 2016).

So, any measures you take in response to the 2024 COLA increase may need to be reviewed next year. For now, you may want to contact your financial advisor to see how any of the ideas mentioned above might be included in your comprehensive financial strategy.