Ask the Advisor: May 2022

To Manage Inflation How Much Extra Do I Need to Budget In 2022?

Q:  I was laid off from my job in 2020 when companies closed due to COVID-19.  I decided to retire and started Social Security benefits in 2021.  The 5.9% COLA raised my $1,237 benefit in 2021 by $73 to $1,310.  After the Part B deduction of $170.10, I receive $1,139.90.  I paid $148.50 for the Part B premium in 2021 so the $21.60 per month Part B increase reduced my $73 COLA boost to $51.40.

In terms of dollars, how much more should I budget for routine expenses this year?  My monthly expenses have gone up far more than the COLA raised my benefits.

A:  That’s a very good question, but one that I’m not sure we can answer with any certainty.  We can give you an idea about current inflation trends, and how inflation might affect your benefits and a simple “back of the envelope budgeting method” to help your planning and for discussion with a financial advisor if you speak with one.

A new survey by TSCL indicates that, even after receiving the highest Social Security cost-of-living adjustment (COLA) in 40 years, most retirees report they are worse off financially in 2022 due to soaring prices.  Like you, many report their actual monthly household expenses rose more than the amount of their COLA boost.  Seventy-three percent of survey respondents who receive Social Security said their household expenses increased by at least $96 per month in 2021.  Nearly half of all survey participants, 48 percent, reported that expenditures had increased by more than $144 per month.

 Although the COLA for 2022 was announced in October of 2021, inflation is pushing prices to heights unseen since 1981 when the COLA was 11.2%.  For example, the March 2022 data for the CPI-W, the consumer price index used to calculate the COLA, was up 9.4% over March of 2021.  To keep up with inflation your monthly Social Security benefit would need to be a$116.30 per month higher, or $1,353.30 in April instead of $1,310.  “Thus, inflation as of April 2022, left you with a shortfall of at least $43.30 per month, due to continuing inflation.  However, this does not tell you what you really need to address all rising expenditures.

One very simple way to do that is to take the current annual inflation rate, 9.4%, and apply that to your monthly expenditures from the corresponding month a year ago to figure how much higher expenditures might be in May of this year.  For example, if your household spent $2,750 per month in May of 2021, and inflation is 9.4% you may need $3,009.00 for May 2022.  Don’t be surprised if you need as much as 10% or more though.  As people age, new health conditions can cause the need for new prescriptions and higher out- of – pocket spending, among other things. You can find current inflation numbers by checking the consumer price index information on the website of the U.S. Bureau of Labor Statistics.

How long will inflation continue?  Federal Reserve Chairman Jerome Powell recently started financial actions to bring down the rate of inflation, but even so inflation may take some time to turn around.