Social Security will increase just 0.3% in 2017, which translates into a raise of $5 per month to a national monthly average of $1,360. Over the last decade, increases have ranged from zero to 5.8%.
And to make matters worse, this increase will likely be eaten up by increases in Medicare Part B premiums (covering outpatient services).
Medicare Part B premiums will likely increase by about 20%. Luckily, the Feds include a provision in the law that limits Medicare Part B premium increases in excess of the Social Security increase (the “hold harmless” provision). This provision covers a majority of Social Security beneficiaries but not all.
The crazy thing about this hold harmless law is that the people who are not included in the provision bear the burden. Since the law excludes many people from getting large increases, those that aren’t “held harmless” see even greater increases in their premiums.
It’s as if you couldn’t afford to pay a higher car insurance premium because you didn’t get a raise in your paycheck. Then your neighbor was asked to pay twice as much for their car insurance premium because the insurance company knew the form customer wouldn’t be able to pay.
Sound crazy? It is!
Your Social Security will get a meager increase and it will likely be offset by an increase in Medicare Part B premiums.
Then for those that aren’t “held harmless”, they’ll see an even sharper increase in their Medicare part B premiums and a lower take home pay.
Those not “held harmless” include people enrolling in Medicare Part B for the first time in 2017, people who are on Medicare but not taking Social Security benefits and current enrollees who are above a certain income. Taken together, this could make up about 33% of all Medicare beneficiaries.
Medicare Part D prescription drug plan premiums are also increasing by an average of 9% to $42.17 per month.
So, in the face of all the increases in Medicare costs, what are you going to do to optimize your retirement and collect more money than you would if you simply relied on the anemic growth of Social Security?
There is little you can do to stop increases in Medicare premiums. You instead have to focus on what you can do to increase your income to keep up with rising costs.
The Social Security Administration (SSA) increases Social Security pensions when the consumer price index, specifically the CPI-W, increases by a certain percent. The Bureau of Labor Statistics calculates the monthly change in CPI-W. The SSA updates the beneficiaries Primary Insurance Amount annually.
The issue is we’re see is that inflation is actually between 1 – 2% in 2016 but the basket of goods used to calculate the CPI-W is increasing at a lower rate. Now we have seen energy and food prices decline in 2016, which was partially offset by a sharp rise in heath care costs. The lower energy and food prices were caused by a steep decline in oil. Oil is a main input in the price of food, not just energy (many commodities analysts believe the price of oil will stay low for a prolonged period but no one knows for sure).
The increase in your Social Security in 2017 will be less than the actually rate of inflation you’re seeing in the market place. The Federal Reserve has a target inflation rate of 2% annually. That means they will determine their monetary policy in order to achieve that 2% inflation rate. I would consider 2% inflation a long-term trend that could fluctuate drastically from year to year.
Increasing Your Income in Retirement
Since you don’t have any control on rising costs for Medicare and other everyday goods, it makes sense to focus on what you can do to increase your income.
Many retirees have been pushed into riskier asset classes because of the Fed’s zero interest rate policy over the last few years. Retirees can longer invest in savings accounts and certificates of deposit to earn an income. Long-term bonds have become risky too since an increase in overall interest rates will crush the principle on your bonds. Instead, you’re forced into stocks and potentially junk bonds with a high-yield but lower credit rating.
One of the quickest ways to increase your income in retirement is to ensure that your assets are earning as much as possible without taking on more risk than tolerable.
You’ve probably heard of the old rule of thumb: the amount you should, as a percentage, 100 minus your age in equities / stocks. For example, if you’re 60 , you should keep 40% of your portfolio or assets in stocks (100 – 60 = 40%).
However, with people living longer, many financial advisors (myself included) recommend that equities / stocks should make up more like 110 or 120 minus your age. You can adjust that number based on your risk tolerance.
Consider someone 65 with a relatively high tolerance for risk. I would argue that this person should have 55% of their portfolio in a diverse group of dividend paying stocks (120 – 65 = 55%). You have to keep up the growth of your portfolio in retirement because you’ll be living longer.
But what kind of equities should you own?
I favor owning a diverse group of high quality individual stocks outright instead of investing in ETFs or especially mutual funds. I understand that some folks just want to buy one fund that diversifies everything for you. I get it. If that’s the case, I’d recommend an ETF. Have you considered the Vanguard Dividend Growth ETF or simply one that tracks the S&P 500?
The reason I like individual stocks, even for retirees, is that there is no fee to own them, except for the commission to buy and sell. Additionally, each dividend paying stock generally pays dividends quarterly, with some even paying monthly.
With the low increase in Social Security benefits in 2017, wouldn’t it be great to setup a diverse portfolio of dividend paying stocks? Even better, wouldn’t it be great to setup a diverse portfolio of stocks that pay you dividends on a monthly basis – dividends that you could use to pay your monthly expenses instead of simply saving?
Setup Your Portfolio to Pay You Monthly Income
Since most stocks pay a quarterly dividend, you could setup a portfolio with different stocks that pay dividends at a different time during each quarter. For example, you could have 5 stocks that pay dividends in January, 5 different stocks that pay dividends in February, and still 5 more stocks that pay dividends in March. The stocks that pay dividends in January will pay them again in April, July, and October. The stocks that pay dividends in February will pay them again in May, August, and November and so on.
You’ll want to make sure you’re not buying stocks with yields above 6% in most cases (don’t chase yield! – you’ll get burned). Additionally, if the stocks you buy are paying less than 3%, then you’ll want to make sure they have a dividend growth rate that’s above average (like HSY that currently yields 2.6% and has an above average dividend growth rate). This will ensure that the stocks you buy that have an initially lower yield will increase over time during your retirement.
With Social Security increasing only 0.3% in 2017, you’ll need a strategy to increase your other income so that you can keep up with inflation. Transferring some of your assets / portfolio from cash, savings, and certificates of deposits to quality dividend paying stocks / equities is one way to accomplish this.
So take some of that money not earning anything and put it to work in dividend paying stocks!