3 Strikes & You’re Out

The U.S. government began paying a COLA on Social Security benefits in 1975. Back in 1980, Social Security benefits increased with a COLA of 14.3 percent when the consumer price index (CPI) was 13.5 percent. The last time Social Security benefits remained flat with no COLA was back to back in 2010 and 2011. The CPI during that period was 1.7 percent and 3.2 percent respectively.1 The economic loss of the COLA will negatively impact most seniors who are on a fixed income. Seniors (age 59½ or older) are generally conservative savers with no stomach for the ups and downs of the market, so they seek the safety of bank savings accounts. But money market accounts are paying next to nothing and even jumbo five-year certificates of deposit pay only 2.20 to 2.35 percent. The economic loss to taxes reduces the spendable money seniors have to pay bills every month, and middle-class seniors seem to pay a disproportionate share of taxes. Many seniors also pay taxes on their Social Security benefits and interest earned on CDs and money market accounts.

One alternative to consider is tax-deferred fixed annuities. The interest rates credited are generally a little higher than certificates of deposit for the same holding period and taxes are deferred until you access your money. You overall tax bill may be reduced further by deferring constructive receipt of your annuity earnings, which could favorably impact the taxation of your Social Security benefits. There are usually penalties for early withdrawals from annuities, so it’s important to have your financial advisor review the contract terms before you purchase one. Watch the interview with Certified Annuity Specialist Liz Cornell http://rightonthemoneyshow.com/seniors-go-down-swinging-as-the-fed-throws-curves-liz-cornell/ Keep in mind if you elect to take guaranteed lifetime income from an annuity, you could add a COLA rider to guarantee an annual increase every year for the rest of your life. Annuities are not insured by the FDIC or any government agency. So it’s important to have your financial advisor review the balance sheet and ratings of the insurance company before you purchase an annuity.

¹U.S. Bureau of Labor Statistics, Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W): U.S. City Average, by expenditure category and commodity and service group.