Social Security's Next COLA Could Be Smaller Than Expected — How To Get Ahead of It
Every year, millions of retirees wait for Social Security's annual cost-of-living adjustment (COLA) to help offset rising prices.
If inflation continues to cool, next year's COLA could end up smaller than many beneficiaries expect, while prices haven’t actually dropped, which could make their budgets feel even tighter.
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The Social Security Administration calculates COLAs using third-quarter Consumer Price Index (CPI-W) inflation data and typically announces the official 2027 adjustment in October. Here’s what retirees should do to prepare.
Why a Smaller COLA Matters More Than Many Retirees Realize
A smaller COLA doesn't necessarily mean prices are falling, it just reflects slower inflation. What that looks like at the practical level, according to Gregory DuPont, an attorney, certified financial planner (CFP) and founder of Advocate Wealth Solutions, is that “Social Security loses purchasing power against real-world costs.”
Additionally, services like healthcare, which seniors depend on more than the average person, often rise faster than the official inflation measure COLA is based on, he explained. While COLAs are designed to preserve purchasing power, not increase it, retirees counting on a more robust bump may feel budget pressure.
Who's Most Vulnerable to a Smaller Benefit Increase?
While every beneficiary receives the same percentage COLA, not everyone feels its impact equally. DuPont explained that the retirees who feel it most are those “relying on Social Security for the majority of their income, with little flexible savings to absorb the gap."
How To Prepare Before the Official COLA Is Announced
Retirees should not wait until the new COLA takes effect to consider their plan. Instead, retirees and pre-retirees should stress-test their retirement plans now and look for ways to reduce dependence on annual benefit increases.
Steps to take include:
Reviewing retirement spending
Identifying discretionary expenses and making cuts
Building additional income sources where possible
And pre-retirees should treat lower COLA trends “as a nudge to save and strategize a bit more, not panic,” DuPont said. He recommended stress-testing your retirement budget assuming COLA underperforms for several years to see where the gaps are.
Don't Rely on Social Security Alone
Social Security should ideally be only one piece of a diversified retirement income strategy. The best way to reduce COLA dependence is having other income sources that aren't tied to it, DuPont said, such as a diversified portfolio, part-time income or an annuity with its own inflation provisions.
"I had a client who assumed Social Security would keep pace with her actual costs. It didn't, and she had to adjust her withdrawal rate mid-retirement rather than by design,” he explained.
Additionally, many people don’t realize that delaying claiming benefits each year will increase your check by about 8% per year up to full retirement age of 70.
It’s important for older folks to realize that “Social Security is inflation-adjusted, not inflation-proof. There's a real difference,” DuPont said.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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