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

• Social Security benefits have lost around 20% of buying power since 2010.

• COLAs are calculated using a price index for urban wage earners and clerical workers instead of retiree spending patterns.

• Seniors spend more on healthcare and housing where inflation outpaces the overall rate used for COLA calculations.

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

If you are retired and you are relying heavily on Social Security as an income source, you are probably already aware that your benefits aren’t stretching as far as they used to.

The unfortunate reality is that while Social Security benefits are supposed to help ensure that retirees maintain their full buying power during the whole of their retirement, this is not working in practice. Seniors are falling behind despite the fact that Cost of Living Adjustments (COLAs) happen automatically, and that’s because a flaw in the COLA formula means that annual raises for retirees don’t go far enough during most years.

The good news is, there are ways to fill the gap resulting from Social Security not doing a good job keeping up with your needs.

Here’s what you should know about why your COLA is likely to let you down — and why an annuity could be the solution that helps you enjoy the secure retirement that you truly deserve.

COLAs are built into Social Security because seniors typically rely on their retirement benefits as an income source for decades. Prices, of course, go up over time — which is why penny candy no longer costs a penny and everything costs more than it did a few years ago.  If Social Security benefits didn’t increase regularly, retirees would face serious hardship as their buying power would erode every year, despite their benefit amount staying the same on paper.

Unfortunately, the COLAs that are happening are falling short of the inflation that retirees are actually experiencing. That’s happening because of a problem with the benefits formula. Under the current formula, the COLA is set each year based on third-quarter data that looks at year-over-year price changes. Retirees get a COLA that’s equal to the percentage increase in total prices in the basket of goods and services included in a consumer price index.

And here’s where the issue is. The consumer price index used to calculate COLAs is a price index that is designed to see how prices are going up for urban wage earners and clerical workers. So, the index is designed to match the spending habits of this group. Seniors on Social Security are not usually in that group, though, as they are usually neither urban wage earners nor clerical workers.

Seniors tend to spend differently than those individuals around whom the consumer price index is designed, with retirees often spending more of their income on healthcare and housing. Unfortunately, inflation in these areas tends to outpace overall inflation, which creates a problem for seniors. Their COLAs aren’t keeping up with the inflation they are actually experiencing because the formula is using a price index that doesn’t match their spending patterns.

The Senior Citizens League reports that benefits have lost around 20% of their buying power since 2010 as a result of this issue.

Unfortunately, Social Security benefits aren’t as stable a source of guaranteed lifetime income as they should be, because of the issue with their buying power declining. For those worried about having enough to live on, adding another source of guaranteed income can be the right move. An annuity is one possible source, as annuities can come with guaranteed income, sometimes for life, and sometimes with protection against inflation built in.

The sad reality is that Social Security’s rules are probably not going to change any time soon, and COLAs are going to continue to let seniors down. Adding an annuity to your asset mix gives you the flexibility to find the right product with appropriate terms and conditions that can set you up to have the income you truly need as a retiree.

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

And no, it’s got nothing to do with increasing your income, savings, clipping coupons, or even cutting back on your lifestyle. It’s much more straightforward (and powerful) than any of that. Frankly, it’s shocking more people don’t adopt the habit given how easy it is.