Cost of Living Adjustments (COLA) are periodic increases that social security recipients receive. These COLAs are essential to the financial security of retirees, many of whom depend on Social Security as their primary source of retirement income. Without the adjustments, the value of benefits would drop rapidly due to inflation.

Unfortunately, if you claimed your Social Security benefits earlier, the COLAs will be smaller in terms of the additional amount you receive each year. Here’s why.

How Applying for Social Security Benefits Early May Affect Your Cost of Living Adjustments

When you claim Social security benefits early you reduce the size of your monthly checks – sometimes up to 30%. This means that all of your future COLAs will also be smaller, thanks to the way cost of living adjustments work. You see, seniors don’t get a lump sum increase under the COLA rules, but rather see an increase equal to a percentage of their benefits.

In 2021, for example, retirees will benefit from a COLA adjustment of 1.3%. If your starting benefit is smaller because you applied for it earlier, you get an additional percentage of a smaller starting amount, so your income will increase each year. Suppose, for example, that your standard benefits at full retirement age of 66 would have been $ 1,500, but you claimed benefits at 62 instead of 66. You would see your benefits decrease by 25%, so your monthly check would only be $ 1,125. If you get a 1.3% COLA on a monthly benefit of $ 1,125, you would get only $ 14.63 more per month, compared to an increase of $ 19.50 if you received a monthly benefit of $ 1,500 instead.

That extra $ 4.87 may not seem like a lot, but it’s almost $ 60 a year. And because COLAs are always percentage-based, this same process will happen every year when there is an increase in Social Security. Of course, your percentage increase will be the same as for any other retiree. But that doesn’t take away from the fact that such a small amount of money is added to your check – especially since you’ll usually be hit by the same. Increase in health insurance premiums like most other retirees. Health insurance premiums are taken from your checks, so it’s more likely that most or all of your extra money from your COLA will disappear to pay the premiums if your increase is small.

Lower COLAs are one of the main reasons you will never make up for monthly income for your checks if you applied for benefits later. This does not necessarily mean that you will have less income for life – it depends on how long do you live. But that means you’ll spend the rest of your retirement years on a lower Social Security check. And that can be a big deal if you’re relying on that money to make ends meet.

If you don’t want a lower check or a smaller annual increase in terms of the extra dollars you receive, seriously consider delaying the start of your benefits for as long as possible. up to 70 years (when there is no more benefit to be expected). And if you’re already retired and claimed your benefits earlier, you’ll just have to budget for the fact that you’re likely only getting a few extra dollars a month in Social Security every year.