2024’s Disappointing Social Security COLA Is Hurting Retirees: 5 Alternative Ways to Approach Retirement Savings

Social Security is vital to millions of Americans. Consider that “the bottom 40% of lifetime earners will receive over 80% of their retirement income through the program,” per the Peter G. Peterson Foundation. “Without Social Security benefits, a staggering 38% of older adults would have incomes below the poverty line,” according to Kathleen Romig, director of Social Security and disability policy at the Center on Budget and Policy Priorities.

Yet, the more you learn about Social Security, the more disappointed you might feel. For one thing, the average monthly retirement benefit isn’t huge. As of May, it was only $1,917, which comes out to about $23,000 per year. The annual cost of living adjustment (COLA) often disappoints, too. For 2024, it was just 3.2%. And according to the latest estimate from the nonpartisan Senior Citizens League, the upcoming COLA for 2025 may be less than 2.6%. That’s likely to take a toll on the budgets of millions of people whose expenses rise by more.

Image source: Getty Images.

Social Security basics

For anyone who needs a refresher, know that Social Security operates by taxing workers’ earnings and then using that money to pay out benefits to retirees. The system has worked well for many decades, though it’s facing some challenges as people are living longer on average than they used to.

You can claim your Social Security benefits when you are as young as 62, but if you do that, your monthly checks will be smaller, though you’ll receive more of them. If you delay taking benefits (up until you turn 70, at which point the credits you earn for waiting max out), your checks will be bigger, though you’ll receive fewer of them. We each need to carefully think through the question of when to claim Social Security, as your answer can make a big difference in the total amount of benefits you receive.

Cost of living adjustments, or COLAs

For more than half of Americans, delaying starting to collect your benefits until age 70 is likely to get you the most income, in total, from Social Security. It will also maximize your monthly benefit — which means that every COLA you receive will deliver more dollars. For example, if you’re receiving $2,000 per month, a 3% increase means $60 more dollars, while a 3% increase on a $2,500 benefit means $75 more dollars.

Those COLAs may look like they don’t make that much difference, but even a $60 bump per month amounts to $720 more over the course of the year — and those higher benefits continue into the future while getting increased further in most years. And in some years, the COLA can be quite significant.

Source: Social Security Administration.

(Each year’s increase is announced in the preceding year. So the 3.2% increase for 2024 might be on the program’s books as for 2023, but it became effective in January 2024.)

Clearly, a 2025 COLA of less than 2.6% might disappoint. But it would still be significantly higher than many previous hikes. And because those annual boosts are pegged by law to inflation, the bottom line is that you can’t do anything about it other than try to maximize your Social Security benefits in the first place.

Looking beyond Social Security

To best prepare for retirement, look beyond Social Security –most of us will want or need much more income than it provides anyway. Here are five retirement-savings strategies to consider:

1. Save aggressively and invest effectively. Unless you already have a substantial nest egg, that can mean socking away much more than 10% of your income — and investing your long-term dollars in stocks, perhaps via a low-fee S&P 500 index fund.
2. Make good use of tax-advantaged retirement accounts such as such as IRAs and 401(k)s. Traditional accounts offer up-front tax deductions on the money you contribute for the tax year in which you contribute it, while Roth accounts provide you with tax-free withdrawals in retirement.
3. Try to set up multiple income streams for your retirement. These can include dividend income from your stock portfolio, annuity income, income from rental properties, pension income, and so on. If you have, say, $400,000 in dividend-paying stocks with an overall dividend yield of 3%, that’s $12,000 in annual income, and those payouts are likely, on average, to increase over time.
4. Think outside the box a little. You may be able to earn more money that you can add to your retirement nest egg by taking on a side gig — and you could work at that a little during retirement, too. For even more income, you might take in a boarder or look into a reverse mortgage. Another good strategy is putting all raises and bonuses into your retirement savings as much as you can.
5. Above all, be sure to have a solid retirement plan. Figure out how much income you’ll likely need in retirement, and then come up with a realistic strategy for how you’ll get it. Ideally, be a little conservative and aim for somewhat more than you think you’ll need. It’s often smart to prepare for the worst while hoping for the best.

While it’s true that the 2025 Social Security COLA may leave retirees’ budgets feeling a little tighter, it’s also true that there are plenty of ways for today’s workers to plan for a comfortable retirement. See how many of the strategies above you can put into action.