If you receive Social Security, you’ve probably already heard that your checks in 2023 will be bigger – considerably bigger, in fact. How can you make the best use of this extra money?
Here’s what’s happening: For 2023, there’s an 8.7% cost-of-living adjustment (COLA) for Social Security benefits – the largest increase in 40 years. Also, the monthly Medicare Part B premiums are declining next year, to $164.90/month from $170.10/month, which will also modestly boost Social Security checks for those enrolled in Part B, as these premiums are automatically deducted.
Of course, the sizable COLA is due to the high inflation of 2022, as the Social Security Administration uses a formula based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). So, it’s certainly possible that you will need some, or perhaps all, of your larger checks to pay for the increased cost of goods and services. But if your cash flow is already relatively strong, you might want to consider these suggestions for using your bigger checks:
Reduce withdrawals from your investment portfolio. When you’re retired, you will likely need to withdraw a certain amount from your portfolio each year to meet your expenses. A boost in your Social Security may enable you to withdraw less, at least for a year. This can be particularly advantageous when the markets are down, as you’d like to avoid, as much as possible, selling investments and withdrawing the money when investment prices are low. And the fewer investments you need to sell, the longer your portfolio may last during your retirement years.
Help build your cash reserves. When you’re retired, it’s a good idea to maintain about a year’s worth of the amount you’ll spend from your portfolio in cash, while also keeping three months’ of your spending needs in an emergency fund, with the money kept in a liquid, low-risk account. Your higher Social Security checks could help you build these cash reserves. (Also, it’s helpful to keep another three to five years’ worth of spending from your portfolio in short-term, fixed-income investments, which now, due to higher interest rates, offer better income opportunities.)
Contribute to a 529 plan. You could use some of your extra Social Security money to contribute to a tax-advantaged 529 education savings plan for your grandchildren or other family members.
Contribute to charitable organizations. You might want to use some of your Social Security money to expand your charitable giving. Your generosity will help worthy groups and possibly bring you some tax benefits, too.
While it’s nice to have these possible options in 2023, you can’t count on future COLA increases being as large. The jump in inflation in 2022 was due to several unusual factors, including pandemic-related government spending, supply shortages and the Russian invasion of Ukraine. It’s quite possible, perhaps even likely, that inflation will subside in 2023, which, in turn, would mean a smaller COLA bump in 2024.
Nonetheless, while you might not want to include large annual COLA increases as part of your long-term financial strategy, you may well choose to take advantage, in some of the ways described above, of the bigger Social Security checks you’ll receive in 2023.
When opportunity knocks, you may want to open the door.
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