Social Security is an invaluable resource for millions of retirees, providing critical income and helping to keep many out of poverty. One key benefit that many people overlook is Social Security’s cost-of-living adjustments (COLAs), which help retirees keep up with inflation.
But while COLAs are helpful, I’m not relying on them as a major part of my retirement strategy. Here’s why, and what I’m doing instead.
Why Social Security COLAs Aren’t Enough
1. Social Security COLAs Aren’t That Big
The 2026 COLA is projected to be 2.7%, slightly higher than the 2.5% increase in 2025. Historically, COLAs have often been below 3%, though there have been some larger increases in recent years, such as 5.9% in 2022 and 8.7% in 2023.
Let’s say you’re receiving the average Social Security retirement benefit of $2,007 per month. A 2.7% COLA would bump that up by $54 per month ($648 annually), which might help, but it’s not a game-changer for most retirees.
2. COLAs Are Based on a Suboptimal Measure of Inflation
Social Security’s COLAs are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks inflation based on the spending habits of workers.
But retirees tend to spend differently, with healthcare and prescription drugs often taking up a larger portion of their budgets. A better inflation measure for retirees would be the CPI-E, which specifically reflects the spending habits of older adults.
3. Social Security Itself Is Threatened
The Social Security system is facing a long-term financial challenge. By 2034, it’s projected that the Social Security trust fund will be depleted, and benefits could be reduced to 81% of what they’re currently owed.
While there are potential solutions, it’s unclear whether future COLAs will apply to reduced benefits or the current full benefit amounts.
What I’m Doing to Combat Inflation Instead
While COLAs are helpful, they’re not going to carry me through retirement. That’s why I’m building other sources of income to combat inflation. Here’s what I’m doing:
1. Dividend-Paying Stocks
Over the last decade, I’ve been shifting my stock portfolio to include more dividend-paying stocks. I’m aiming for this income stream to generate around $20,000 to $30,000 per year. Plus, many dividend-paying stocks increase their payouts over time, which can help keep up with inflation.
2. Stocks (Non-Dividend)
In addition to dividends, I’m prepared to sell some stocks if I need to generate extra income during retirement. Having an overall withdrawal strategy will be crucial for managing my income needs.
3. Retirement Accounts
I’ve been contributing to tax-advantaged retirement accounts like IRAs and 401(k)s. Some of these accounts have required minimum distributions (RMDs), which will give me additional income. I’ll also have the flexibility to withdraw more if needed.
4. Annuities
I’m considering investing in fixed annuities. An annuity can provide me with guaranteed, regular payments for life, which is a great way to hedge against inflation and ensure a steady income stream for both myself and my spouse.
5. Delaying Retirement
I’m also planning to work a few more years, beyond age 62, to build up my retirement nest egg. By continuing to work, I can increase my savings and reduce the risk of relying too heavily on Social Security, especially when the future of COLAs is uncertain.
Don’t Count Too Much on Social Security COLAs
While COLAs can provide some relief, they are unlikely to fully address your financial needs in retirement. That’s why it’s important to have other income sources in place.
By focusing on strategies like dividend-paying stocks, annuities, and tax-advantaged retirement accounts, you can create a more secure financial future without relying solely on Social Security’s COLAs.
If you’re behind on your retirement savings, you should also consider Social Security strategies that can increase your income. For instance, there’s a $23,760 bonus that most retirees completely overlook, and taking advantage of these little-known “Social Security secrets” could provide a significant boost to your income.
Social Security COLAs are a helpful tool, but they are unlikely to provide enough income on their own during retirement. I’m planning ahead by building multiple streams of income—stocks, annuities, retirement accounts, and continued work—to combat inflation and maintain my financial security.
Don’t rely too heavily on COLAs; instead, focus on other ways to ensure you’re comfortable in retirement.
