Retirees' finances are likely to be better in the next year than they were in the previous one. All walks of life were affected by elevated prices due to the rise in inflation.

Social Security checks are going to rise by the largest amount in four decades. The SSA's cost-of-living-adjustment is meant to help preserve as much purchasing power for retirees as possible.

According to a study by the Senior Citizens League, recipients of Social Security have lost as much as 40% of their purchasing power over the last decade. There will be a potentially expensive surprise.

Understanding the COLA

The Consumer Price Index for Urban Wage Earners and Clerical Workers is used by the SSA to calculate the cost of living. Wage earner and clerical worker prices are tracked for a market basket of consumer goods and services.

Person on couch looking at check.

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During the months of July, August, and September, the SSA calculates the average number of the consumer price index. The percentage difference is the cost of living adjustment for the next year.

It shows just how intense inflation was when the cost of living is 8.7% for the year. With the average Social Security check for retirees in November at about $1,632 per month, a typical recipient could see checks rise by more than $1,700 per year.

So, what's this expensive surprise?

Social security benefits can be taxed. If you have supplemental income in addition to your benefits, it's likely that this will happen. It could come into play for many other retirees because of the income from stock dividends.

The combined income is a number that includes adjusted gross income plus nontaxable interest and half of your Social Security benefits. 50% of your Social Security benefits could be taxed if you make more than $25,000 a year. This isn't the tax rate, it's just the amount of your benefits that could be taxed. 85% of your Social Security benefits are subject to taxation if your combined income is over $34,000.

thresholds for married couples 50% of your benefits will be taxed if the combined income of you and your spouse is over $32,000. 85% of benefits could be subject to taxation if your combined income is more than $44,000.

With benefits set to rise by so much in the future, the combined income of individuals and couples may be pushed over the thresholds that cause them to be taxed. It could turn into an expensive surprise if you don't look into it quickly.

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