Power Up Wealth podcast – Impact of Inflation on Social Security – Episode 32 transcript:
James Derrick 0:00
Inflation is at 40-year highs, and it has a massive impact on everyone, especially retired Americans. I’m James Derrick, and today my guest is Sharla Jessop. She’s going to teach us about the impact of inflation on Social Security benefits and retirees.
Sharla Jessop 0:26
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
James Derrick 0:49
Sharla, thank you for joining me today.
Sharla Jessop 0:51
Thanks for having me.
James Derrick 0:52
It’s great to be the host of the podcast that you usually host. Sharla is the President of Smedley Financial. She holds a CFP designation. Sharla, I’ve heard it explained with inflation that by Alan Greenspan originally, I believe that the idea was that inflation should be low enough, that it’s not a major concern for everyone. But that is not the case right now at 40-year highs, inflation has been out of control. Would you explain to everyone why inflation is uniquely a concern for retirees?
Sharla Jessop 1:24
Retirees are in a situation different from those of us who are still working, where our income keeps up keeps pace with inflation, we get raises, bonuses, and things like that throughout the year in most careers, but a retiree they’re locked in. Their incomes become fixed. And oftentimes, they don’t even keep up with inflation. Some things have a cost of living component, and some things do not.
James Derrick 1:49
With Social Security, specifically, there’s something called a COLA. Explain what a COLA is and where does the number come from.
Sharla Jessop 1:56
The COLA, which is a cost of living adjustment, is something that Social Security has every year. And it’s based on CPI W, which is a little bit different than the CPI (Consumer Price Index) we’re generally familiar with. And it’s based on a three-month period of time. So it’s based on the numbers for July, August, and September, which September is reported in October. That’s why in October, we find out what that number is. And retirees live on very fixed incomes that don’t really fluctuate. And sometimes Social Security might be the only little uptick they get in their income year over year.
James Derrick 2:34
So 8.7%. That sounds amazing. But as you said, the inflation has already happened. So they’re really just catching up to what happened this year already. And it doesn’t matter what inflation does, then in November, December that 8.7 is locked in.
Sharla Jessop 2:51
Right. It starts in January the following year, and it’s locked in, but it benefits them because they are already on a fixed income. So where we are battling inflation right now, their inflation numbers are really more significant than ours. Let’s look at the basic expenses and inflation. Food: eating at home is up 13%. Energy, household energy costs are up 21%. That’s something that all of us are dealing with. But imagine it impacting a fixed income. Then retirees also have additional expenses and inflation that most of us in younger generations don’t have. And that is the cost of aging, which is healthcare, the cost of prescription drugs, additional needed medical assistance. All of those things are also increasing at a great rate. Those impact a fixed income severely.
James Derrick 3:44
Well, it’s fascinating because I remember 10, 15 years ago, I mean, we were every year, we were seeing the major impact of medical expenses and healthcare costs increasing at such an unbelievable rate. And it has a huge impact on retirees. And now we’re seeing something that we really have not seen for a long, long time, which is everything is up. And so it’s going to feel really, really tight. Especially October, November, December of this year, until that COLA, kicks in. And then at that point, everybody automatically gets a raise. They’re gonna be a lot better off in January than they were in December, though, but but it still might not be as amazing as it sounds,
Sharla Jessop 4:30
Right! Because when we say 8.7% cost of living increase, it sounds big and great, and it is. But we’re also combating 21% energy increase costs, and 13% increase in food, so they’re still going to be at a deficit. It’s still going to be tight for retirees.
James Derrick 4:51
Let’s go back. You mentioned that the COLA comes in Social Security automatically. Is there any other place that retirees receive COLAs?
Sharla Jessop 5:02
That’s a good question. Pensions, which not a lot of people have anymore, but current retirees do have pensions, the majority of them. Some have a cost of living increase, but the majority do not increase with inflation. They’re is a flat amount set. So for them, the only way that they would have to offset that or outpace inflation would be through some type of an investment account that has the potential to grow at a greater rate than what inflation is over time.
James Derrick 5:32
Now unfortunately, inflation is usually not good for investments either. And so it’s just a difficult time. I guess that makes the COLA in Social Security unique and a great benefit.
Sharla Jessop 5:46
It is.
James Derrick 5:47
Sharla, do you have any other strategies that you would recommend to retirees to offset the impact of inflation, either this year or next year if it continues?
Sharla Jessop 5:59
That’s a great question as well, because you can do planning that can help you prepare and offset that. We do income distribution planning. We call it Income For Life. And part of that program is planning for inflation and the impact of inflation, and determining how we will offset it in advance. Because inflation isn’t something you can avoid. It’s not something that’s going to hit some people and not others, it hits everybody equally. And the only way to outpace it if you don’t have a cost of living adjustment in a fixed income you’re receiving like pension or Social Security is through other avenues. Through your investments. Through other retirement plans or something you’ve put together. So we incorporate that into our income distribution planning. And I would say that that is probably one of the biggest things that someone who is nearing retirement or in retirement should consider is going through our lifetime of income plan so that they know that they are prepared and they don’t fear that they’re gonna run out of money, but are still able to enjoy life today. Nobody wants to be have their income and their lifestyle cutback just to maintain life.
James Derrick 7:09
Oh, absolutely. I would say that keeping up with inflation would be goal number one, for sure. Sharla, thank you for joining me today.
Sharla Jessop 7:16
Thank you, James.
Shane Thomas 7:22
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn.
The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Lorayne B. Taylor, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
