What's Happening to Your Social Security in 2014?
Around this time every year, the Social Security Administration announces the cost of living adjustment, or COLA, to Social Security benefits. That number represents the increase in payments that a recipient can expect to receive based on inflation over the past year.
This year, thanks to the partial government shutdown, the announcement of that adjustment will be a little bit delayed. The reason? The necessary personnel at the Bureau of Labor Statistics are apparently not classified as "essential," thus the September inflation number has not been published. Without that number, Social Security can't follow its standard process for calculating COLAs.
What will happen to Social Security?
Current indications are that while the COLA announcement will be delayed, it will still happen. The key questions are when that will occur and how large the rate increase will be. The Social Security COLA is tied to the rise in inflation, which all available indications suggest will show a small growth of about 1.5%.
The average retiree's Social Security benefit was $1,270.38 in August 2013, the most recent month available as of this writing. If the COLA increase comes in at the anticipated 1.5%, it'll boost that average payment by about $19.06 per month to $1,289.44.
Unfortunately, if you're also a Medicare Part B recipient, there's a good chance that nearly all of that increase will be eaten up by Medicare premium increases. While the Medicare Part B premium rates don't appear to be finalized either, an analysis by medicare.com (no relation to the official medicare.gov site) suggests Medicare Part B rates may rise enough to eliminate much of that COLA boost:
Annual Income (individual tax return)
Annual Income (joint tax return)
Actual 2013 Premium
Estimated 2014 Premium
$85,000 or less
$170,000 or less
$85,001 - $107,000
$170,001 - $214,000
$107,001 - $160,000
$214,001 - $320,000
$160,001 - $213,000
$320,001 - $426,000
More than $213,000
More than $426,000
Data and estimates from Medicare.com, as of Oct. 14, 2013.
If you're a Social Security recipient who deducts your Medicare premiums from your check, you probably won't see your Medicare Part B premium rise faster than that Social Security payment. There's a "hold harmless" provision that keeps those Part B increases smaller in line with or less than the Social Security COLA for most recipients. Still, that's a large chunk that would be taken out of what could already be a small Social Security increase, leaving that much less to pay for your remaining costs of living.
Can you do anything about it?
If you're already receiving Social Security, your options for dealing with the situation are limited.
If you're able to work you can earn cold, hard cash to supplement your Social Security check. Once you reach your full retirement age, you can keep your total Social Security benefit and earn a salary, though with enough income some of your Social Security benefit may become taxable. Additionally, if by working you earn enough to displace low- or no-income years from your earnings record, your Social Security check may increase thanks to adding higher income years to your record.
Beyond that, you'll need to rely on cost-cutting or your investment portfolio for additional supplemental income. If you're following the 4% rule, you may want to consider whether your advancing age or your recovering portfolio would permit you to bump up your withdrawals. You may find that you can increase your distribution to help cover the remaining gap without adding substantial risk of running out of cash before you pass from this earth.
Alternatively, if you're relying on the income your portfolio throws off for your supplemental expenses, you may wish to consider whether you'd be willing to shift to higher-yielding securities. That sort of shift generally comes with higher risks, but the potential returns may well be worth the added risks.
For instance, the iShares Barclays 1-3 Year Treasury Bond exchange-traded fund currently has a microscopic 0.27% yield, but its year-to-date return has been a positive 0.16%. As an ETF that holds short-term Treasuries, it's one of the "safest" investments out there, but the yield isn't going to be enough to cover many of your costs.
Moving bond durations to the other extreme of 20-plus years, the iShares Barclays 20+ Year Treasury Bond ETF currently has a 2.96% yield. While the bonds held by that fund have the same government guarantee of repayment of its shorter duration counterpart, that fund's total return year to date is about -12.5%. The key driver of that negative return is rising interest rates this year. Thanks to their larger "modified durations," longer-term bonds fall faster than short-term ones when rates rise.
In the stock world, there are opportunities to get higher yields than those Treasury ETFs, albeit with the additional risks of stock ownership. For instance, the iShares Select Dividend ETF has a 3.3% yield. That ETF is based on holding stocks of companies that have a decent history of paying dividends. As a result of relying on dividends rather than government-backed guarantees, there's a chance that the dividends could get cut. On the flip side, though, those dividends can grow over time if the companies in the portfolio increase their payments.
Speaking of increasing dividends, the PowerShares High Yield Equity Dividend Achievers has a yield of 3.81%, and it holds high-yielding companies that have a history of increasing their dividends. Again, dividends are riskier than government-backed payment guarantees, but this ETF offers the opportunity for a higher current yield with the chance for potential income increases over time.
What will you do?
Ultimately, there are no perfect options for a Social Security recipient facing a small, though still uncertain, COLA increase for next year. Between cutting your costs, working if possible, and considering adjustments to any supplemental investments you may have, you have a handful of tools to help you cover your costs in 2014.
Social Security Will Still Be There in 2014
Uncertain COLAs and all, Social Security still plays a key role in your financial security. In our brand-new free report, "Make Social Security Work Harder For You," our retirement experts give their insight on making the key decisions that will help ensure a more comfortable retirement for you and your family. Click here to get your copy today.
The article What's Happening to Your Social Security in 2014? originally appeared on Fool.com.
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