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How Cost-of-Living Index Changes Can Impact Your Retirement - Part 2

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A decrease in the COLA index will result in a substantial drop in Social Security benefits.

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I ran a scenario to see what happens if the federal government moves the COLA index to the chain-weighted CPI and the COLA index is reduced by 0.25% per year vs. the growth rate in their expenses. In this scenario I assumed their expenses grow by 3% per year and the COLA index grows by 2.75%. I found the following:



Although the decrease of 0.25% in the COLA index might not sound like much, we see that the compounding of this change over time has dramatic results. The cumulative social security benefits that this couple can expect to see declines by over $94,000 in today's dollar terms. Their average annual Social Security benefit will decline by over $3,200 in today's dollar terms.

This is a big change for many people and can mean the difference between retiring comfortably or putting off retirement for several years. It is best to assume that Social Security benefits will be cut in the future, one way or another. I have recommended for some time now that people should be conservative with their assumptions when it comes to how much their lifetime Social Security benefits will be.

I have also recommended trying to make up for any Social Security shortfall by investing in strong dividend payers throughout retirement. Companies such as Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), Wal-Mart (NYSE:WMT), Exxon (NYSE:XOM), and Procter & Gamble (NYSE:PG) are great additions to a retirement portfolio. I recently wrote a piece on how a company like Procter & Gamble can change your entire retirement situation.

These companies I've listed have shown an ability to increase their dividends year after year, even in the face of recessions. By investing in strong dividend payers you can worry less about Social Security because you will be receiving steady income from your dividends all throughout retirement.

Editor's Note: Douglas Carey is a regular contributor to Minyanville's blog.
No positions in stocks mentioned.
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