Surviving Without The Social Security COLA

By Mark P. Cussen, CFP®, CMFC, AFC | January 12, 2011 AAA
Surviving Without The Social Security COLA

For decades, Social Security recipients have been able to count on receiving their government benefits like clockwork each month. And for most of that time, a small cost of living increase has been factored into their Social Security benefits each year to offset the effect of inflation. Unfortunately, that trend is going to end in 2011. Recent legislation has mandated that Social Security benefits are going to stay at the same level as they were in 2010, thus eliminating the COLA (cost of living adjustment) increase for the year. Furthermore, the "do over" option that existed in the past has also been eliminated, thus preventing retirees from having their benefits recalculated at a current higher rate in return for repaying all past benefits received. Retirees who were counting on this increase may find their budgets a bit harder to manage than expected. Fortunately, there are several ways to make up for this shortfall. (You've probably contributed to this fund, but will you reap the benefits? Find out here. Read Introduction To Social Security.)

IN PICTURES: Top 7 Social Security Myths: Exposed

Get a Part-Time Job
Even working just five hours a week at a retail store can probably make up for most of the difference in monthly benefits. It may make sense to estimate how much your benefits would have increased and then divide that amount by the hourly wage at your job to see how much you need to work.

Increase Your Pension or Retirement Plan Distributions
If you are taking only the mandatory minimum distribution from your IRA, pension or other retirement plan, you might want to consider raising this amount slightly for the coming year. Again, you can estimate the amount of COLA increase that you'll need and divide this by 12 if you take monthly distributions. (Find out everything you need to know about this program and whether it will benefit you. See 10 Common Questions About Social Security.)

Tighten Your Belt
Find something in your budget that you can eliminate for a year. This might be a good year to cancel your cable subscription, or at least the movie or premium channels. Use your Christmas money to get a discount club membership and buy staple necessities in bulk. Dust off your library card and that weight set that's been collecting dust in your basement. Let your gym membership go for a year and pump some iron at home. Chances are you'll save more than the COLA difference for the year.

Invest More Aggressively
This might be a good time to reallocate some of your investment portfolio into slightly more aggressive choices, such as preferred stocks, utilities or corporate bonds. Guaranteed instruments such as treasury securities and CDs are paying historically low rates. Taking a bit more risk can increase your returns by perhaps a percent or two, depending upon various factors, and this can go a long way toward bridging the shortfall created by the COLA freeze.

Liquidate Some Assets
2011 might be a good year to sell some of your company stock and use the proceeds to pay down debt or make a necessary major purchase. The favorable capital gains tax rates created by the Bush Administration have been extended for two more years, so this could be a good time to judiciously liquidate assets. (Find out how to work the system to get the highest total benefits the law allows. Check out 4 Unusual Ways To Boost Social Security Benefits.)

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Enjoy the Tax Savings
Those whose budgets are not materially impacted by the lack of COLA increase in their Social Security checks may just want to sit back and enjoy the reduction in their taxable incomes.

The Bottom Line
These are just some of the ways that Social Security recipients can make up for the shortfall created by the COLA freeze. Current legislation suggests that these suggestions may be relevant in 2012 as well. But the long-term uncertainty surrounding Social Security in America will remain a key issue for politicians and retirees for the next several decades.

For the latest financial news, check out Water Cooler Finance: Conflicting Job Reports And A Facebook IPO.

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