I'm Not Counting on Social Security COLAs to Carry Me Through Retirement. Here's What I'm Doing to Combat Inflation Instead.

Key Points

• Annual increases from Social Security are vital, but they're generally not huge.

• They may not keep up with the actual inflation faced by seniors.

• Plan around Social Security, setting up other income streams.

• The $23,760 Social Security bonus most retirees completely overlook ›

There's a lot to love about Social Security. For one thing, it lifts millions out of poverty and it's the main source of retirement income for many millions. A key benefit that lots of people overlook is that it's also designed to help retirees keep up with inflation -- via its nearly annual cost-of-living adjustments (COLAs).

Still, while I'm looking forward to collecting Social Security one day, and I'm grateful for those COLAs, I'm not counting on the COLAs to carry me through retirement. Here's why, and what I'm doing instead.

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Why I'm not counting on Social Security COLAs for a lot

Here's why I'm not putting a lot of stock in Social Security COLAs:

Social Security COLAs are not that big

The COLA for 2026 is currently expected to be around 2.7% -- a bit above 2025's 2.5% increase. Historically, increases have often been below 3%, but there have been some higher ones in recent years, such as 5.9% for 2022 and 8.7% for 2023. The average monthly Social Security retirement benefit was $2,007, as of July, amounting to around $24,000 annually. A 2.7% COLA would boost that to $2,061, a $54 increase per month and $648 for the year.

Increases are based on a suboptimal measure of inflation

Social Security's COLAs are based on inflation rates as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) -- an index tracking changes over time in the prices of a basket of popular goods and services. But retirees are not workers, and their spending patterns are a bit different, in general. COLAs would arguably better serve retirees if they were based on the CPI-E, not the CPI-W above, because the CPI-E is meant to better reflect the spending of older folks -- for example more appropriately weighting expenses such as healthcare.

Social Security itself is threatened

Social Security's surplus is turning into a deficit. It's been estimated that by 2034, there will only be enough money coming to the program (mainly via taxes on workers) to pay beneficiaries 81% of what they're owed. It's true that there are multiple ways to fix the problem, but Congress will have to enact them. If retirees end up with reduced benefits, it's not clear whether the future COLAs will increase those smaller benefits or the full ones.

What I'm doing to combat inflation instead

So, what should retirees do about COLAs? Well, you can welcome them, of course, but don't expect them to greatly improve your finances. Ideally, you should plan around Social Security, aiming to have multiple other income streams in retirement. Here are some I'm working on or considering, myself:

• Dividend-paying stocks: Over the past decade, I've been shifting my stock portfolio to include more dividend payers, so each year I'm collecting more dividend income. I'm trying to build this stream so that it might deliver $20,000 or $30,000 to me each year. (Remember that healthy and growing dividend payers tend to increase their payouts over time, too -- and that can help this income stream keep up with inflation.
• Stocks: Dividend income requires no selling of stocks, but I will also be able to sell off some shares over time, if and when I need to generate extra income. (It's smart to have an overall withdrawal strategy in retirement.)
• Retirement accounts: I have had several tax-advantaged retirement accounts such as IRAs and 401(k)s. Some of them feature required minimum distributions (RMDs) that I'll have to take annually, and that will provide more income. I'll also be able to tap the accounts for more income as needed.
• Annuities: I'm considering investing a portion of my portfolio in one or more fixed annuities, which can deliver regular infusions of cash for the rest of my life -- and my spouse's life.

One more thing I'm doing is not retiring early, say at age 62. I'm going to work a few more years, to build up my nest egg more. It's a way to combat inflation -- by beefing up my nest egg so that it can provide even more income.

Keep these considerations in mind as you plan for your own retirement -- and perhaps, just to be safe, don't count on Social Security and its COLAs for a lot. If they do end up delivering a lot of income, that can just be icing on the cake.

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