Personal Finance

Retirees may feel it’s not enough

Published

2 days ago

January 26, 2025

Business Finance News

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Millions of Social Security beneficiaries have now received their first benefit checks for 2025.

The new 2.5% cost-of-living adjustment — which adds $50 per month to retirement benefits on average — marks the lowest increase since 2021, when inflation spiked shortly thereafter.

With prices still high, many beneficiaries are likely feeling the increase “wasn’t quite enough,” though “every little bit helps,” said Jenn Jones, vice president of financial security at AARP, an interest group representing Americans ages 50 and over.

“When you’re living on a fixed income, when even what some might think are small or mild increases to everyday expenses happen, they can create a real financial burden for older Americans,” Jones said.

One measure, the Elder Economic Security Standard Index — also known simply as the Elder Index — developed by the Gerontology Institute at the University of Massachusetts in Boston, evaluates just how much it costs older adults to pay for their basic needs and age in place.

Social Security alone doesn’t cover adequate lifestyle

Based on a national average, a single person would need $2,099 per month if they are a homeowner with no mortgage, to cover housing, food, transportation, health care and other miscellaneous expenses, according to 2024 Elder Index data.

That goes up to $2,566 per month necessary for single renters, and $3,249 per month for single homeowners with a mortgage.

An older couple who own a home without a mortgage would need $3,162 per month, according to the index. That increases to $3,629 per month for a couple who rents, and $4,312 per month for a couple who has a mortgage on their home.

Those amounts exceed the average Social Security retirement benefits Americans stand to receive. In 2025, individual retired workers receive an average $1,976 per month, while couples who both qualify for benefits have an average $3,089 per month.

To be sure, those Elder Index thresholds are based on national averages, and in some areas of the country retirees may be able to stretch their incomes further than others. Yet the data typically shows it’s difficult to live just on Social Security benefits.

“What we find with the Elder Index is that there isn’t a single county in the country where the average Social Security benefit covers an adequate lifestyle,” said Jan Mutchler, professor of gerontology at the University of Massachusetts in Boston, of comparisons that were run prior to the 2024 data.

‘Prices might be rising faster’

As a record number of baby boomers turn 65, research from the Alliance for Lifetime Income has found 52.5% of that cohort will rely primarily on Social Security for income in retirement since they have assets of $250,000 or less.

The Social Security cost-of-living adjustment aims to track inflation. Yet because those adjustments are made annually, they come with a lag, according to Laura Quinby, associate director of employee benefits and labor markets at the Center for Retirement Research at Boston College.

As inflation spiked, reaching a peak in 2022, Social Security’s COLAs also reached four-decade highs. In 2022, Social Security beneficiaries saw a 5.9% boost to benefits, which was followed by a higher 8.7% increase in 2023. That subsided to a 3.2% increase in 2024, followed by a more modest 2.5% bump for 2025.

The Social Security COLAs largely made up for the inflation surge that happened in 2022, Quinby said. However, inflation is now ticking up again, she said. The consumer price index rose 0.4% in December, slightly above what had been estimated for the month, and was up 2.9% for the year.

“We’re in another period where prices might be rising faster than the Social Security COLA,” Quinby said.

Here's how to calculate your personal inflation rate

How much retirees are affected by inflation varies based on three factors — how much their assets keep up with rising prices, the amount of debt they have at fixed interest rates and whether they change their savings, investment or work behaviors, the Center for Retirement Research has found.

Mary Johnson, a 73-year-old independent Social Security and Medicare analyst, said her Social Security cost-of-living adjustment for 2025 has mostly been consumed by rising costs. While Social Security represents about 40% of her income, much of her other retirement assets are invested in stocks, which saw record growth last year.

Still, Johnson said she’s grappling with increases to her homeowner’s insurance, home heating and cooling bills, food costs, and drug plan premiums. One bright spot is that she did see her auto insurance decline last year.

‘Biggest game changer this year’

A notable change retirees have to look forward to in 2025 is a new $2,000 annual cap on out-of-pocket Medicare Part D prescription drug costs, that was enacted with the Inflation Reduction Act under President Joe Biden.

“That’s the biggest game changer this year for older Americans,” said AARP’s Jones.

More than 95% of Medicare Part D beneficiaries will benefit from that new out-of-pocket cap, AARP’s research has found.

Before the change, the amount of money Medicare Part D beneficiaries spent on their medications was unlimited, with potentially thousands of dollars in out-of-pocket costs, according to Juliette Cubanski, deputy director of the program on Medicare policy at KFF, a provider of health policy research.

The change provides real financial relief and peace of mind, she said.

“If they’re not taking expensive medications now, but they do in the future, they won’t have to potentially go bankrupt or just simply not fill their prescriptions because they cannot afford the out-of-pocket cost,” Cubanski said.

To be sure, Medicare beneficiaries still face other rising costs, particularly with regard to monthly Part B and Part D premiums. Because those payments can be deducted directly from Social Security checks, they may affect just how much of a COLA increase beneficiaries see.

In 2025, the standard monthly Part B premium is $185 per month, while the average standard Part D premium is $46.50. Notably, higher-income beneficiaries pay more expensive rates, though that may not be as noticeable in their household budgets, Cubanski said.

“For others, the fact that they’re paying premiums for Medicare coverage certainly takes away from the amount of money that they have for other essentials,” Cubanski said.

Personal Finance

Social Security Fairness Act beneficiaries may face lengthy wait

Published

3 hours ago

January 28, 2025

Business Finance News

More than 3.2 million people will see increased Social Security benefits, under a new law.

However, individuals who are affected may have to wait more than a year before they see the extra money that’s due to them from the Social Security Fairness Act, the Social Security Administration said in an update on its website.

“Though SSA is helping some affected beneficiaries now, under SSA’s current budget, SSA expects that it could take more than one year to adjust benefits and pay all retroactive benefits,” the agency states.

The Social Security Fairness Act eliminates two provisions — known as the Windfall Elimination Provision and Government Pension Offset — that previously reduced Social Security benefits for certain beneficiaries who also had pension income provided from employment where they did not contribute Social Security payroll taxes.

Those provisions reduced benefits for certain workers including state teachers, firefighters and police officers; federal employees who are covered by the Civil Service Retirement System; and individuals who worked under a foreign social security system.

The law affects benefits paid after December 2023. Consequently, affected beneficiaries will receive increases to their monthly benefit checks, as well as retroactive lump sum payments for benefits payable for January 2024 and after.

The benefit increases “may vary greatly,” depending on an individual’s type of Social Security benefits and the amount of pension income they receive, according to the Social Security Administration.

“Some people’s benefits will increase very little while others may be eligible for over $1,000 more each month,” the agency states.

The Social Security Administration said it cannot yet provide an estimated timeline for when the benefit adjustments will happen.

In the meantime, the agency is advising beneficiaries to update their mailing address and bank direct deposit information, if necessary. In addition, noncovered pension recipients may now want to apply for benefits, if they are newly eligible following the enacted changes.

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Personal Finance

Student loans not affected by federal aid freeze

Published

4 hours ago

January 28, 2025

Business Finance News

'Tremendous amount' of instability under new Trump administration, says CIO

The White House is pausing federal grants and loans, according to a memo sent out Monday night, but the freeze will not impact student loans or financial aid for college.

The freeze, which could affect billions of dollars in aid, noted an exception for Social Security and Medicare. The pause “does not include assistance provided directly to individuals,” according to the memo.

The pause gives the White House time to review government funding for causes that don’t fit with President Donald Trump‘s policy agenda, according to Matthew J. Vaeth, acting director of the White House Office of Management and Budget.

The memo specifically cited “financial assistance for foreign aid, non-governmental organizations, DEI, woke gender ideology, and the green new deal.”

What student aid may be affected

The U.S. Department of Education said the freeze on federal aid will not affect Federal Pell Grants and student loans. It also has no bearing on the Free Application for Federal Student Aid for the upcoming year.

“The temporary pause does not impact Title I, IDEA, or other formula grants, nor does it apply to Federal Pell Grants and Direct Loans under Title IV [of the Higher Education Act],” Education Department spokesperson Madi Biedermann said in a statement.

In addition to the federal financial aid programs that fall under Title IV, Title I provides financial assistance to school districts with children from low-income families. The Individuals with Disabilities Education Act, or IDEA, provides funding for students with disabilities.

The funding pause “only applies to discretionary grants at the Department of Education,” Biedermann said. “These will be reviewed by Department leadership for alignment with Trump Administration priorities.”

The pause could affect federal work-study programs and the Federal Supplemental Educational Opportunity Grant, which are provided in bulk to colleges to provide to students, according to higher education expert Mark Kantrowitz.

However, many colleges have already drawn down their funds for the spring term, so this might not impact even that aid, he said. It may still affect grants to researchers, which often include funding for graduate research assistantships, he added.

Why the freeze caused confusion

“While the memo says the funding pause does not include assistance ‘provided directly to individuals,’ it does not clarify whether that includes money sent first to institutions, states or organizations and then provided to students,” said Karen McCarthy, vice president of public policy and federal relations at the National Association of Student Financial Aid Administrators.

Most federal financial aid programs are considered Title IV funds “labeled for individual students,” and so would not be impacted by the pause, McCarthy said. But all other aid outside of Title IV is unclear at this time, she said: “We are also researching the impact on campus-based aid programs since they are funded differently.”

“When you have programs that are serving 20 million students, there are a lot of questions, understandably,” said Jonathan Riskind, a vice president at the American Council on Education. “It is really, really damaging for students and institutions to have this level of uncertainty.”

The American Council on Education’s president, Ted Mitchell, called on the Trump administration to rescind the memo.

“This is bad public policy, and it will have a direct impact on the funds that support students and research,” he said. “The longer this goes on, the greater the damage will be.”

Personal Finance

Why you may be getting ‘shortchanged’ on CD interest rates, researcher says

Published

6 hours ago

January 28, 2025

Business Finance News

Boonchai Wedmakawand | Moment | Getty Images

You may be leaving money on the table when it comes to certificates of deposit, some research suggests.

CDs have a set term, ranging from a few months to five or more years. Upon maturity, banks return the depositor’s principal plus interest.

Consumers who want their money early must generally pay a penalty, losing out on months of interest. However, paying that withdrawal penalty may be worthwhile for many savers who adopt the right strategy.

That’s what is suggested in a recent research paper from Matthias Fleckenstein, associate professor of finance at University of Delaware, and Francis Longstaff, finance professor at the University of California, Los Angeles.

Rather than pick a short-term CD, consumers often get a higher return by choosing a long-term CD and paying a penalty to pull money out early, they found.

Consumers who are unaware of the strategy may get “shortchanged” by banks, Fleckenstein told CNBC.

‘The rule rather than the exception’

Here’s an example: If an investor puts $1 in a five-year CD with a 5% interest rate and cashes it out after one year with a penalty equivalent to six months of interest, they would receive about $1.03, which is slightly more than the $1.01 they would get from a one-year CD with a 1% interest rate, despite the penalty incurred for early withdrawal.

Banks frequently price CDs this way, Fleckenstein and Longstaff wrote in their paper, published in October in the National Bureau of Economic Research.

The researchers examined weekly CD rates offered by 16,891 banks and branches — ranging from small community banks to big nationwide institutions — from January 2001 to June 2023. Rates were for accounts up to $100,000.

About 52% of CDs offered during that period had such “inconsistencies” in pricing when comparing a given term against a longer-term CD cashed in early, they found.

“It’s the rule rather than the exception,” Fleckenstein said.

“There are banks that do this all the time,” he said, and “there are some that don’t do this at all.”

At banks where this happens, the difference in returns “is not tiny,” Fleckenstein said. In fact, the pricing inconsistency is about 23 basis points, on average, over the roughly two decades they assessed, he said.

Given that disparity, the average investor who invested $50,000 could have gotten an extra $115 of interest by picking a longer-term CD and cashing it in early, their research suggests.

The average size of that pricing difference rose as interest rates began to increase during the Covid-19 pandemic, Fleckenstein said.

CDs often for ‘safety and liquidity’

Households that save in CDs are generally looking for “safety and some liquidity” for a chunk of their assets, said Winnie Sun, co-founder of Irvine, California-based Sun Group Wealth Partners and a member of CNBC’s Financial Advisor Council.

The typical CD buyer has a goal in mind, like saving for a home down payment, and wants to earn a modest interest rate without subjecting their money to much risk, Sun said.

About 6.5% of households held assets in CDs as of 2022, with an average value of about $99,000, according to the most recent Survey of Consumer Finances.

Like any investment, there are pros and cons to CDs.

For example, unlike other relative safe havens like high-yield savings accounts or money market funds, CDs offer a guaranteed return over a set period with no chance of market-based losses. In exchange, however, CDs offer less liquid access to your cash than a savings account and lower long-term returns than the stock market.

“Shop around for the best CD rate across banks, but also look within banks at whether it actually may pay off to accept a longer term but pay an early withdrawal penalty,” Fleckenstein recommended, based on his research findings.

The option may not be as prolific in the current market environment, though.

Long-term CDs typically pay a higher interest rate than shorter-term ones, Sun said. But average rates for one-year CDs are currently higher than those for five-year CDs: 1.7% versus 1.4%, respectively, according to Bankrate data as of Jan. 20.

Households can pursue other CD strategies, Sun said.

For example, instead of putting all savings into a long-term CD, consumers might put a chunk of their money into a long-term CD and with the remaining funds build a “ladder” of shorter-term CDs that mature more quickly. They can then buy more CDs if they’d like once the shorter-term ones come due.