Jan 10, 2023
Four ways to plan ahead for Social Security’s 2023 cost-of-living adjustment
On October 13, 2022, the Social Security Administration announced an 8.7% cost-of-living adjustment (COLA) that will take effect for retirees in January 2023.1 The adjustment is Social Security’s largest increase in 41 years and follows a 5.9% increase in 2022. This announcement could be welcome news for many retirees, especially with slightly lower Medicare premiums, the rising cost of many goods and services amid soaring inflation, and the challenges of a highly volatile market for investors in 2022.
As many retirees prepare to receive larger Social Security checks in 2023, here are four ways to plan ahead for this extra income:
1. Inflation may impact your budget differently than headline inflation figures suggest
Social Security uses the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) to calculate the annual COLA increases. This percentage is based on the change in the CPI-W during the third quarter, on a year-over-year basis. As a retiree, you may devote more of your budget to medical costs and perhaps less to transportation or dining out. This could lead to a different experience compared to the CPI used by Social Security. Therefore, it’s important to be mindful of any expenses you expect to noticeably change and how impactful the inflation adjustment could ultimately be.
2. Medicare premiums are slightly lower in 2023
Medicare premiums for many people are actually decreasing in 2023, and the standard Part B premium is being reduced by $5.20 per month.2 If you’re in a higher income bracket based on your modified adjusted gross income from the two years prior, you’ll pay the base Part B premium plus the Income Related Monthly Adjusted Amount (IRMAA). Many retirees’ have their Medicare premiums deducted from their Social Security payments, so the Medicare premium reduction combined with the COLA could be beneficial.
3. Adjust your portfolio distributions as needed
For many retirees, their income is derived from multiple sources, such as IRAs, taxable brokerage accounts, pensions and part-time or full-time work. The Social Security COLA could be good news, especially for those taking portfolio distributions. In other words, it may be beneficial to reduce your portfolio distributions to save a bit on taxes and allow the money to continue growing in real-dollar terms, especially after a year where we experienced higher inflation and challenging markets. Having an allocation to growth-style investments could help combat the effects of rising living costs in retirement resulting from inflation, but that’s a discussion to hold with your CI Wealth Advisor to ensure that any allocation shift is suitable for your time horizon, risk tolerance and investment objectives.
4. Review tax savings opportunities to keep more of your payments
With higher Social Security monthly payments in 2023, many retirees could end up owing more in income taxes. Strategically taking withdrawals from different types of accounts could lead to greater tax efficiency and, therefore, allow you to keep more of your Social Security payments. For example, IRA owners age 70.5 and older, particularly those who take the standard deduction, may benefit by giving directly to qualified charitable organizations through a Qualified Charitable Distribution (QCD). Others may benefit by paying for medical expenses from a Health Savings Account. Additionally, with the recently signed SECURE Act 2.0, the starting age for required minimum distributions (RMDs) has increased from 72 to 73 in 2023 (and will rise again to age 75 in 2033).3 Even a year’s worth of tax-efficient withdrawals, such as delaying or lowering a distribution from an IRA, could translate into more money in your pocket for 2023. And who couldn’t benefit from having some additional cash during these challenging times?
1 https://www.ssa.gov/news/press/releases/2022/#10-2022-2
2 https://www.cms.gov/newsroom/fact-sheets/2023-medicare-parts-b-premiums-and-deductibles-2023-medicare-part-d-income-related-monthly
3 https://www.cnbc.com/2023/01/03/3-changes-in-secure-2point0-for-required-minimum-distributions.html
ABOUT THE AUTHOR
Chase Mouchet, CFP, CIMA
Chase joined the Brightworth team in 2015 as a financial planner, having previously worked at two independent financial planning firms. He is passionate about helping clients, particularly those who are nearing or in retirement, simplify their financial lives and maximize the impact of their wealth, in areas such as charitable giving.
He has been featured in Money Magazine’s “Money Makeover” and has been published in the Atlanta Journal Constitution, the Dallas Morning News, and Kiplinger. He is a member of the Georgia Planned Giving Council and the Children’s Healthcare of Atlanta Legacy Advisors. Chase received his BBA in Finance and BSFCS in Financial Planning from the University of Georgia and serves on the alumni board of the UGA Financial Planning program.
Chase and his wife, Kate, live in Atlanta with their two children and are active members of their church. He enjoys spending time with his family, activities on the lake, and cheering on the Georgia Bulldogs.
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