As you approach retirement, your focus naturally shifts from building wealth to preserving it and ensuring that the lifestyle you’ve worked decades to achieve remains intact. Yet even the most carefully constructed financial plans must face an often underestimated force: inflation.
What feels like a comfortable income today can quietly erode over time, diminishing purchasing power in ways that are easy to overlook. That’s where Social Security’s cost-of-living adjustment (COLA) comes in. While often viewed as a routine annual update, COLA plays a vital role in helping retirees maintain financial stability, particularly during turbulent economic times.
Understanding how COLA works, and more importantly, how it fits into a broader wealth preservation strategy, can help you make more informed decisions as you plan for retirement.
The Social Security Administration (SSA) calculates COLA annually based inflation, with the goal of helping recipients maintain steady purchasing power. The calculation compares the average Consumer Price Index for Urban Wage Earners (CPI-W) from third quarters (July – September) of the current year to the same period of the previous year.
Each October, the SSA announces the COLA rate which will take effect the following January.
CPI-W, which is tracked by the U.S. Bureau of Labor Statistics (BLS), is an official measure of the monthly price change in a basket of goods and services such as food, energy and medical care.
While COLA ensures that benefits do not decrease due to deflation, an increase is not always certain. For example, in 2016, there was no measurable inflation, and therefore no COLA increase was applied.
Although Social Security was established in 1935, automatic cost-of-living adjustments were not introduced until 1972, with the first COLA implemented in 1975 in response to soaring inflation. Since then, COLA has ranged anywhere from 14.3% in 1980, to 0% in 2010, 2011 and 2016, back up to 8.7% in 2023 amid the post-COVID pandemic inflation.
Through decades of recessions, war times and other crises, COLA has provided retirees with a measure of consistency for their benefit. But it is important to keep in mind that this adjustment is designed to help maintain your current standard of living, not to increase your wealth. Using your COLA adjustment as justification to raise your discretionary spending could affect your overall financial plan.
COLA also only applies to your Social Security income, which represents approximately 31% of total income for individuals age 65 and older. Because of that, it’s important to have a plan in place for other sources of income, such as IRAs, which need to be invested for growth and do not receive a COLA.
Lastly, it’s important to consider the impact of healthcare costs. If you are enrolled in Medicare Part B, premium increases may offset your Social Security benefit increase. However, if your Medicare Part B premium is deducted from your Social Security benefits, which is the case for most Medicare beneficiaries, you may be protected under the “hold-harmless” provision, which ensures that your Medicare Part B premium increase rate will never exceed your Social Security COLA.
Inflation is often felt most notably on essentials such as food, utilities and insurance. Therefore, knowing where adjustments should be made to maintain your lifestyle and preserve your wealth is important for long-term financial stability.
Ultimately, COLA is best understood not as an opportunity for increased spending, but as a mechanism for savings preservation. It is designed to help ensure that the purchasing power supporting your retirement lifestyle remains steady, even as the economic landscape shifts around you. Maintaining consistency often requires just as much intention and discipline as building wealth in the first place.
Incorporating COLA thoughtfully into your broader financial strategy can help reinforce that stability, particularly when paired with other income sources, healthcare costs, and your long-term objectives. If you’d like guidance on how Social Security fits inro your overall financial picture, click here to get connected with an adviser.
If you’re looking to learn even more about the nuances of Social Security and how to potentially get thousands more in your retirement pocket, depending on your situation, join us for our upcoming webinar – Navigating Social Security Strategies to Maximize Benefits.