Social Security COLAs Don’t Cut It. Here’s How An Annuity Can Fill That Gap

• Social Security benefits have lost about 20% of their purchasing power since 2010.

• COLAs are calculated using a price index for urban wage earners and white-collar workers rather than the spending patterns of retirees.

• Seniors spend more on health care and housing, where inflation exceeds the overall rate used for COLA calculations.

• If you’re thinking about retiring or know someone who is, there are three quick questions that make many Americans realize they may retire earlier than expected. take 5 minutes to learn more here

If you’re retired and rely heavily on Social Security for your income, you probably already know that your benefits aren’t going as far as they used to.

The unfortunate reality is that while Social Security benefits are supposed To help ensure that retirees maintain all of their purchasing power throughout their retirement, this does not work in practice. Seniors are being left behind even though cost-of-living adjustments (COLA) occur automatically, and that’s because a flaw in the COLA formula means annual raises for retirees aren’t enough during most years.

The good news is that there are ways to fill the gap that results from Social Security not doing a good job of meeting your needs.

Here’s what you need to know about why your COLA is likely to disappoint you and why an annuity could be the solution to help you enjoy the secure retirement you truly deserve.

COLAs are built into Social Security because seniors often rely on their retirement benefits as a source of income for decades. Prices, of course, go up over time, which is why penny candy no longer costs a dime and everything costs more than it did a few years ago. If Social Security benefits did not increase regularly, retirees would face serious hardship as their purchasing power would erode each year, even though the amount of their benefits remained the same on paper.

Unfortunately, the COLAs being implemented fall short of the inflation that retirees are actually experiencing. This happens due to a problem with the profit formula. Under the current formula, the COLA is set each year based on third-quarter data that analyzes year-over-year price changes. Retirees earn a COLA that is equal to the percentage increase in total prices in the basket of goods and services included in a consumer price index.

And this is where the problem is. The consumer price index used to calculate COLAs is a price index designed to see how prices rise urban wage earners and administrative workers. Therefore, the index is designed to match the spending habits of this group. However, older people who receive Social Security are not usually in that group, since they are not usually urban wage earners or white-collar workers.

Older people tend to spend differently than those around whom the consumer price index is designed, and retirees often spend a larger share of their income on health care and housing. Unfortunately, inflation in these areas tends to exceed general inflation, creating a problem for seniors. Their COLAs are not keeping up with the inflation they are actually experiencing because the formula uses a price index that does not match their spending patterns.

The Senior Citizens League reports that benefits have lost about 20% of their purchasing power since 2010 as a result of this problem.

Unfortunately, Social Security benefits are not as stable a source of guaranteed lifetime income as they should be, due to the problem of their declining purchasing power. For those worried about having enough to live on, adding another source of guaranteed income may be the right decision. An annuity is one possible source, as annuities can come with guaranteed income, sometimes for life, and sometimes with built-in inflation protection.

The sad reality is that Social Security rules probably won’t change anytime soon and COLAs will continue to disappoint seniors. Adding an annuity to your asset mix gives you the flexibility to find the right product with appropriate terms and conditions that can allow you to earn the income you really need as a retiree.

Most Americans drastically underestimate how much they need to retire and overestimate how prepared they are. But the data shows that people with a habit have more than double the savings of those who do not.

And no, it has nothing to do with increasing your income, savings, clipping coupons, or even cutting back on your lifestyle. It’s much simpler (and more powerful) than all that. Frankly, it’s surprising that more people don’t take up the habit given how easy it is.