How Will the Cost of Living Impact Retirees in 2024?

As we look forward to 2024, it is important to acknowledge the ever-changing dynamics of the cost of living and its profound impact on retirees. While retirement should ideally be a time of relaxation and enjoyment, the financial implications of increasing expenses pose significant challenges for those in their golden years. With various factors contributing to the cost of living, how can retirees navigate the financial hurdles facing their generation?

Calculating the Cost of Living Adjustment

While 2023 saw a large 8.7% Cost of Living Adjustment (COLA), 2024 amounts are currently projected to see a steep reduction. In October of each year, the Social Security Administration announces the actual COLA for the subsequent year. If you are one of the 70 million beneficiaries of Social Security, you may wonder how the SSA calculates the annual adjustments.

The SSA compares the average Consumer Price Index (CPI) from the third quarter of the current year with the data from the same period of the prior year. The index used in the COLA calculation is the CPI-W, which is the CPI for Urban Wage Earners and Clerical Workers. The CPI-W is a subject of the CPI-U index, which measures the spending patterns of urban consumers.

While the COLA is designed to help recipients retain buying power from year to year, the reality is that the annual increases have not kept pace with the amount of inflation older adults have experienced. A study by The Senior Citizens League shows that there has been a widening gap between Social Security COLAs and the cost of goods and services purchased by retirees. Additionally, the study found that from 2000 to 2023, benefits under Social Security COLA increased by 78% or 3.4% annually, while overall goods and services purchased by retirees rose 141.4% or 6.2% annually.

In 2023 terms, the retiree would only be able to purchase $64 of goods and services that would have bought $100 worth in 2000. Often this means retirees must make significant compromises in their purchases and budgets, which can lead to undesirable outcomes. 

Watch to Learn More About Calculating Annual Social Security COLA

How COLA Affects Cash Flows for Retirees

Rising Healthcare Costs

The steep reduction in the cost of living adjustment for 2024 can have an indirect impact on healthcare costs for retirees. While the COLA specifically affects Social Security benefits, it can also influence retirees’ overall financial situation, including their ability to afford out-of-pocket expenses, insurance premiums, medications and long-term care expenses.

Retirees should evaluate their budget, identify areas where they can cut expenses and prioritize healthcare-related costs. By focusing on essential healthcare needs, retirees can allocate their limited resources more effectively. Additionally, keeping up with changes in healthcare policies, insurance plans and available resources is crucial. Retirees should review their insurance coverage annually, compare plans and explore options that provide the necessary healthcare services at a more affordable cost.

Housing and Rental Market

Retirees often face the challenge of finding affordable housing options that meet their needs. With a reduced COLA, retirees may experience limited growth in their retirement income, which can make it more challenging to afford housing costs. This reduction can affect retirees’ ability to cover mortgage payments, property taxes, maintenance expenses and homeowners’ insurance. 

Additionally, a reduced COLA may limit retirees’ ability to afford specialized housing arrangements such as senior housing, potentially impacting their access to the care, services and amenities they need as they age.

Those who choose to rent rather than own a home may also feel the impact of a reduced COLA. Rental prices tend to increase over time, but with limited growth in retirement income, retirees may struggle to keep up with rising rents. This can make it harder for them to find suitable and affordable rental accommodations. By budgeting, exploring government assistance, considering housing alternatives and seeking professional advice, retirees can make informed decisions about their housing options.

Inflation and Consumer Prices

Inflation is an ongoing economic reality that can erode retirees’ purchasing power over time. A reduced COLA means that retirees’ Social Security benefits and retirement income will experience limited growth. With inflation and rising consumer prices, retirees may find that their purchasing power diminishes over time. This can make it more challenging to afford everyday essentials and maintain their desired standard of living.

Long-Term Care

Long-term care services, such as nursing homes, assisted living facilities and in-home care, often come with significant costs. A reduced COLA can limit retirees’ ability to adequately save and plan for these expenses. With limited income growth, retirees may find it more challenging to afford long-term care services or access higher-quality care options. They may be forced to deplete their savings, rely on family assistance or make compromises on the quality and extent of care they receive.

Social Security and Retirement Savings

A reduced COLA can impact retirees’ monthly income and their ability to maintain their desired standard of living. With a smaller COLA, retirees may experience limited growth in their Social Security benefits, which can strain their overall budget and financial stability.

A reduced COLA can also indirectly impact retirement savings. Retirees often rely on a combination of Social Security benefits and their personal retirement savings to fund their post-retirement years. With a smaller COLA, retirees may have less income to contribute to their savings or may need to withdraw more from their savings to cover their expenses. This reduction can impede the growth of their retirement savings, potentially impacting their financial security in the long term.

How to Mitigate the Impact of COLA on Retirees

Plan and Budget

Retirees should review their budget and expenses to identify areas where they can maximize savings. Analyzing spending habits, cutting unnecessary expenses and prioritizing essential needs can help retirees manage their finances more effectively.

Those who rely on retirement savings may also need to adjust their withdrawal strategies. Consulting with a financial advisor can help determine the most sustainable withdrawal rate and ensure that retirement savings last throughout their retirement years.

Diversify Income Sources

Relying solely on Social Security benefits or a single retirement income stream can leave retirees vulnerable to a reduced COLA and inflation. Working with a financial advisor, retirees can develop investment strategies that aim to generate returns that outpace the rate of rising consumer prices. Diversifying investment portfolios and considering assets that historically protect against inflation, such as stocks, real estate and inflation-protected securities, may be beneficial.

Prioritize Health and Wellness

Maintaining good health can help reduce healthcare expenses and improve overall financial well-being. Invest in preventive measures, such as regular exercise, a healthy diet and preventive screenings. Prioritize self-care and seek affordable healthcare options to manage medical costs effectively.

Retirees who have existing health savings accounts (HSA) can use the funds to pay for qualified medical expenses. HSAs provide a tax-efficient way to save for healthcare costs, and any unused funds roll over from year to year.

Read More About How A HSA Can Help With Retirement Planning

Work With a Fortune Financial Advisor

The cost of living impact on retirees in 2024 presents both challenges and opportunities. By understanding the key factors contributing to rising expenses and taking proactive steps, retirees can navigate the financial landscape and enhance their quality of life. From healthcare costs to housing, careful planning, financial literacy and seeking professional advice can empower retirees to achieve financial security and enjoy their well-deserved retirement years to the fullest.

Consulting with a Fortune Financial advisor who specializes in retirement planning can provide retirees with personalized guidance on navigating the evolving cost of living impact. Contact us to review your individual portfolio or with other financial concerns at fortuneinfo@fortuneadv.com. Take our complimentary risk score assessment to determine how much risk you can handle over the short term to hit long-term goals. Also, make sure to follow our YouTube channel or other social media accounts for more financial planning tips. Scan the QR code below to connect with us.

Important Note

This material is provided for educational purposes only and does not constitute investment advice. The information contained herein is based on current tax laws, which may change in the future. Fortune Financial Advisors cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. The information provided in these materials does not constitute any legal, tax or accounting advice. Please consult with a qualified professional for this type of advice. The information provided above is obtained from publicly available sources and is reliable. However, no representation or warranty is made as to its accuracy or completeness.