Collecting Social Security? Why You Shouldn't Wish for Giant COLAs, Period.

You'll often hear that retiring on Social Security alone is no easy feat. Those benefits will generally only replace about 40% of your wages if you earn an average salary. And most retirees can't live comfortably on a 60% pay cut.

If you do end up retiring on just Social Security, you may find yourself hoping for large cost-of-living adjustments (COLAs) year after year. After all, larger COLAs mean more money in your pocket.

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But larger Social Security COLAs aren't actually the good thing you think they are. Here's why you may not want to wish for them.

The problem with giant COLAs

When you're working and get a huge raise, it's something to celebrate. But in the context of Social Security, large raises aren't automatically so wonderful.

The reason? Social Security COLAs are tied directly to inflation. The more living costs rise from one year to the next, the more Social Security benefits tend to go up.

But the important thing to understand is that any large COLA you get will come at the expense of higher price increases. So all told, you're generally not looking at a net financial gain when you receive a larger COLA.

Let's say your Social Security check goes up $60 a month, but groceries, gasoline, and utilities start costing $60 more per month as well. In that case, you're not gaining anything. At best, you're breaking even.

Also, Social Security COLAs are based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. But the CPI-W doesn't typically reflect the costs seniors on Social Security face. Rather, as the index's name implies, it's geared more toward working folks.

Because of this mismatch, Social Security benefits tend to lose out on buying power over time, even during periods when COLAs are larger. That's because the expenses Social Security recipients tend to spend a lot on, like healthcare, often outpace inflation.

Don't bank too heavily on COLAs

If you're on Social Security, it's easy to see why you'd hope for large COLAs year after year. But you may be better off hoping for moderate inflation and raises so your budget isn't too squeezed.

Of course, the optimal situation is to rely on Social Security for only a portion of your retirement income and supplement those benefits with IRA or 401(k) withdrawals, a pension, part-time work, or another source of income. But if Social Security constitutes most or all of your senior income, it's important to be realistic about what COLAs are designed to do -- and recognize that larger ones aren't always a blessing.

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