Social Security serves as a lifeline for tens of millions of retired Americans. The Social Security Administration reported that in 2024 an average of nearly 68 million Americans per month will receive a Social Security benefit. These benefits total around $1.5 trillion paid during this calendar year alone.
Here are two changes coming to Social Security in 2025 that all retirees should prepare for, according to The Motley Fool:
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1. The 2025 COLA Will Likely be Smaller
The 2025 COLA (cost of living adjustment) for Social Security beneficiaries is expected to be smaller. COLAs are tied to inflation, and with significantly lower inflation rates projected for this year, seniors will likely see a smaller increase than in recent years. There was an 8.7% increase in 2023, a 5.9% increase in 2022, and a 3.2% increase this year. However, experts currently predict a 2.7% COLA for 2025.
The COLA calculation has historically underestimated the actual inflation experienced by retirees. This is because it uses a price index based on the spending habits of clerical workers and urban wage earners, which doesn’t accurately reflect the expenses of seniors. As a result, COLAs have consistently fallen short of covering the true cost increases faced by retirees, leading to a significant loss in purchasing power over time.
2. Full Retirement Ages Are Moving Later
This change affects those who haven’t yet retired but are planning to do so in the near term. The full retirement age (FRA) will increase in 2025. Those who were 66 in 2024 have an FRA of 66 and eight months, but those turning 66 in 2025 will have an FRA of 66 and ten months. Anyone turning 66 in 2026 or later will have an FRA of 67. This change is important for retirees to consider when deciding when to start claiming their benefits.
Claiming benefits even one month before your (FRA) results in early filing penalties that permanently reduce your monthly benefits. To avoid these penalties, you must wait until exactly 66 and 10 months if you turn 66 next year. The reduction is 5/9th of 1% for each of the first 36 months you receive benefits before your FRA and 5/12th of 1% for any month before that.
With a later FRA, you must either work a few additional months to avoid early filing penalties or accept a lifetime reduction in benefits by claiming them early. It’s crucial to understand how FRA is changing to make an informed decision about when to claim your benefits.
Things You Can Do Now To Prepare
If you’re concerned about a higher full retirement age and a potentially smaller COLA in 2025, here are three things you can do now to shore up your finances and prepare ahead of time:
Get a Side Hustle
Side hustles can help boost your income, especially if your retirement funds are lacking. This can range from babysitting, dog walking, pet sitting, becoming a rideshare driver or grocery delivery driver and more. Many side hustles offer flexibility and a chance to make some extra cash to supplement your retirement.
Build Your Emergency Fund
Having at least 3 to 6 months’ worth of cash on hand is crucial. Be sure to add more cash to your emergency fund as you near retirement and park your money in a high-yield savings account so you can benefit from the magic of compound interest.
Reduce Unnecessary Spending
Take some time to go through your bank statements to identify expenses that you may be able to reduce or eliminate altogether. That streaming service that you only use once every three months, the $5 latte on your way to the office, and that gym membership that you no longer use but still pay for: these are all expenses to cut so you can make room in your monthly budget for saving and investing.
