The average Social Security check increased this year due to inflation: Here's how much it is

With inflation at its highest rate since 1982, the Social Security administration made a 5.9% cost-of-living adjustment (COLA) for benefits doled out in 2022. In April 2022, the average monthly benefit for retired workers was $1,666.49. The average monthly benefit spousal benefit was $837.34.

The Social Security administration ties the cost-of-living adjustment to the annual inflation rate. By changing the COLA every year to reflect price changes, the Social Security Administration helps ensure that inflation does not eat away at people's retirement benefits.

If you haven't retired yet, you can estimate what your Social Security benefits will be with the Social Security Administration's calculator. It's important to note that while you can start collecting benefits at age 62, if you wait until full your full retirement age (or longer) your monthly check will be larger.

While this year's cost-of-living adjustment helps retirees facing higher prices on everything from their grocery to gas bills, the rising cost of Medicare could still reduce peoples' monthly benefits. 

In 2022, Medicare Part B premiums, which are deducted from retirees' Social Security benefits, increased more than $20 from $148.50 to $170.10. This $21.60 price increase was the largest Part B basic premium increase in the program's history, according to AARP. The increase in premiums was due to Medicare's coverage of a new alzheimer's drug, Aduhelm.

In May 2022, Health and Human Services announced that it had overestimated the cost of the drug and that premiums would be reduced in 2023 as a result.

Retirees, however, will likely still feel the impact of inflation despite the COLA and reduced Medicare premiums in 2023. In May 2022, the year-over-year inflation rate was 8.6% with some of the largest price increases seen in new and used cars, food and gasoline. 

So, what can future retirees do about inflation eroding the value of their Social Security benefits? 

First off, Social Security was intended to be a supplement to people's retirement savings. The National Institute on Retirement Security (NIRS) describes retirement income as a 'three-legged stool', consisting of Social Security, a pension plan, and individual retirement savings through accounts like a 401(k) or an individual retirement account. 

However, since the 1980s, fewer and fewer companies have been offering pension plans to their employees. The onus for saving for retirement has fallen on the employee.

And most people aren't doing great when it comes to saving for the future: A 2020 NIRS study found that 40% of Americans rely on Social Security as their sole source of retirement income. The average annual Social Security benefit for a worker is nearly $20,000, hardly enough money for most retirees to subsist on.

When it comes to saving for retirement, it's important to start as early as you can, whether that's through an employer-sponsored 401(k) or a traditional or Roth IRA. By saving for retirement early in life, you'll reap the benefits of compound interest, which is interest earned on interest.  

For example, if you started saving for retirement when you're 25 and had investments yielding a more conservative 6% return, you would need to invest $530 per month for 40 years to reach $1 million. If you waited until you were 40 and had investments yielding a 6% return, you would need to invest $1,500 per month for 25 years to end up with $1 million.

While it may seem daunting to start saving hundreds of dollars every month, you can start small and increase your savings rate over time. Experts generally recommend saving between 10% and 20% of your annual income, but if you have credit card debt or other high interest debt, you generally should prioritize paying that off before you start investing. 

If your employer matches your 401(k) contributions, you'll want to focus on maximizing the match. By doing so, you're earning free money. A 401(k) is considered a pre-tax retirement account. With a 401(k), money is automatically deducted from your paycheck, and you won't pay taxes on that income until you withdraw it in retirement 

After you've maximized your employer's 401(k) match, you might consider opening an individual retirement account (IRA). The traditional and Roth IRA are the two most common types of IRAs. For IRAs, the contribution limit is $6,000, but individuals over the age of 50 can make catch-up contributions for a max limit of $7,000.

Like a 401(k), a traditional IRA is a pre-tax retirement account where individuals don't pay taxes on their investments until they withdraw them in retirement. An traditional IRA has no income limits, so it's available to everyone regardless of how much money you make. 

A traditional IRA also offers a tax advantage: Traditional IRA contributions may be tax deductible, depending on your income and if you have a retirement plan through work. This means your traditional IRA contributions can reduce your taxable income, which can reduce the amount of income tax you owe each year you make contributions. 

A Roth IRA offers a different type of tax advantage. Individuals use after-tax income to make contributions and then their investments grow and can be withdrawn tax-free. A Roth IRA, however, is not available to everyone due to income limits. For 2022, the income limit for single-filers is $144,000 and for married couples filing jointly it is $214,000.

When Select analyzed over 20 traditional IRAs and 20 Roth IRAs, it ranked Charles Schwab as having the best traditional and Roth IRA. This was based on factors like whether a minimum deposit was required, the fees and the variety of investment options offered. 

If you're a newbie to the world of investing, you can also opt for a robo-advisor which will create a portfolio based on your financial goals, retirement horizon and risk tolerance. Robo-advisors typically invest in low-fee mutual and exchange-traded funds. It then uses an algorithm to rebalance your portfolio by periodically buying and selling funds and securities in order to meet your financial goals. 

Select ranked Wealthfront and Betterment as some of the best robo-advisors based on factors like the types of fees, whether there were account minimums and the types of investments offered.

Regardless of what type of retirement account you choose, it's vital to start saving for retirement as early as possible, even if it's just a few dollars a month.

While Social Security benefits are adjusted for inflation each year, the rising cost of healthcare and the fact that Social Security was intended to only supplement people's retirement savings means that you'll want to build a sizeable nest egg for your golden years.

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