Social Security and Inflation in 2025: 8 Ways To Prepare for Cost Increases

For anyone who relies on Social Security income in retirement, inflation is a big concern because it can push the cost of living beyond whatever budget you may have set.

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Although The Federal Reserve Board tries to keep inflation around 2% annually, recent highs of as much as 8% have proven that it isn’t always possible to control so easily.

Financial experts offered tips on how to prepare your retirement plan, including important details about Social Security, to best hedge against future inflation .

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Don’t Bank on Cost-of-Living Adjustments

Inflation directly impacts Social Security benefits through cost of living adjustments (COLA), but these adjustments may not always keep pace with real inflation trends, especially in healthcare and housing costs, according to Tyler Meyer, CFP and founder of RetireToAbundance.com .

For example, the years during and since the pandemic’s start have seen higher than normal COLAs, according to Patrick Doherty, CFP and senior vice president at Wealth Enhancement Group .

“The COLAs won’t be as generous [going forward] as they have been the past couple of years,” he said.

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Diversify Your Equities

To prepare for potential inflation in 2025 and beyond, retirees should focus on protecting their purchasing power through assets that outpace inflation, Meyer added.

“Traditionally this is done with a well-diversified equities portfolio.

“Additionally, retirees should evaluate their overall spending plan. A clear understanding of their essential versus discretionary expenses will allow them to make adjustments if inflation outpaces the COLA.”

Consider When To Take Social Security

Perhaps the biggest consideration when thinking about Social Security is finding the opportune time to take it, Doherty said. While a lot of retirees want to retire early, doing so minimizes the amount of Social Security you’ll get.

“Between age 62, when you can first take Social Security and full retirement age of 67, Social Security will grow by itself at 6% a year with delayed retirement credits,” he said. “So you’re looking at a 30% increase if you wait to take Social Security until full retirement age.

“If you wait even longer, until 70, your Social Security income will grow by 8% a year.”

The delayed retirement credits make a big difference, he emphasized.

“So that’s pretty powerful when you’re looking at Social Security that way.”

Plan For Longer Life Expectancy

You also have to factor in that life expectancy has gone up, Doherty pointed out.

“There’s a 73% chance that one person in a couple makes it to 90, and for one person in a couple living up to 95, there’s a 46% chance.” While longer lives is good news, it also means that your money has to last longer in retirement.

One of the strategies to deal with this, Doherty said, is to have the higher-earning spouse delay Social Security as long as possible.

“Because if something happens to the higher-earning spouse, the other spouse will get that higher benefit.”

Factor In Medical Expenses

While Social Security is a significant piece of many people’s retirement income, Doherty said that many people forget to factor in their healthcare and medical expenses in retirement, especially in the years before they can qualify for Medicare.

Between the ages of 60 and 65, one of the biggest expenses is medical, and until you can qualify for Medicare, you can be paying anywhere from $1,800 to $2,400 per month if you don’t qualify for lower rates in healthcare exchanges, Doherty said.

“So a lot of times, budgeting wise, while you might only need a hundred thousand dollars to live your lifestyle, you also need to factor in medical expenses until Medicare kicks in. A lot of times people haven’t thought about that. So budgeting is very important,” Doherty said.

Plan For Lifestyle Activities

Another consideration when planning your retirement is that the retirees of today are much more active than their parents or grandparents, and these activities come with lifestyle costs.

“We’re more active, we’re doing things, we’re traveling, we’re going to the gyms, we’re social, we’re going to restaurants. So you’ll spend in retirement what you spend now,” Doherty said.

“Don’t think you’re going to spend that much less in retirement. You might not be commuting as much, but you’re going to have to lunch more. You’re not going to need work clothes, but you’re buying sneakers or gym clothes.”

Budgeting Is Key

Budgeting is very important before and in retirement, Doherty stressed. Thinking about your budget will allow you to be strategic about which retirement vehicles you’re drawing money from in addition to Social Security.

“If you need say $60,000 a year delivered from your investments plus Social Security, in five years from now, because of inflation, you might need $65,000 or $75,000 from your investments,” Doherty said.

He recommended that retirees not be too conservative with any investments, as well, so that they’re not relying only on Social Security at any point.

“Your investments won’t keep up with inflation and withdrawal rates. You have to come up with a good plan for your investments to work along with Social Security,” Doherty said.

It’s a good idea to keep as much of your retirement income invested as long as possible to keep it earning.

Be Strategic About Taxes

Don’t forget, too, that money taken out of accounts like 401(k) plans and traditional IRAs will be taxed, as is up to 85% of Social Security, depending on the state you live in. He recommended getting the support of a financial advisor to figure out how to withdraw income strategically so as not to bump up to a higher tax bracket.

Retirees should assume that inflation will go up, that Social Security COLAs may or may not keep up, and you should have one or more back-up plans to draw income.

This article originally appeared on GOBankingRates.com : Social Security and Inflation in 2025: 8 Ways To Prepare for Cost Increases