How to Build a Retirement Budget That Works Whether the 2027 COLA Is 2% or 4%

If you're collecting a monthly paycheck from Social Security, there's a key number you may be tracking -- the upcoming cost-of-living adjustment, or COLA. At this stage of the game, there are a number of estimates out there pointing to a larger COLA in 2027 than what came through in 2026.

It's too soon to nail down an official COLA, since those annual raises are based on third-quarter inflation data. That means that the Social Security Administration won't be able to confirm next year's COLA until October.

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For this reason, it's important to build a 2027 retirement budget that's not dependent on any specific benefit increase. You should ideally be able to pay your bills whether next year's Social Security COLA is 2%, 4%, or somewhere in between. Here's how to set up a budget that actually works.

Start with your essential expenses

The key to setting up a budget is identifying your core expenses and making sure they take priority. List your essential costs like housing, transportation, medical care, utilities, and food, all of which need to come first.

From there, you can add line items for discretionary spending. You'll need to make sure your essential needs are covered before you make plans to subscribe to an extra streaming service or take a vacation.

Build in room for unplanned costs

Whether it's a leaky roof, a car that won't start, or a hospital stay that leaves you with a pile of medical bills, it's important to have room in your budget for unexpected expenses. Before you commit to any non-essential costs, make sure you're leaving yourself with enough income to pay for things that may catch you off guard.

Assume your COLA won't keep up with inflation

The whole purpose of Social Security COLAs is to help benefits keep up with inflation. In reality, they often fall short.

It's best to go into the new year assuming certain costs of yours will increase faster than the raise your benefits get. You may want to pre-emptively inflate those costs in your budget, especially if they're non-negotiable things like food and medication.

It's too soon to determine how much Social Security benefits will increase in the new year. Your best bet is really to construct a budget with the assumption that you won't get any COLA at all. That way, any increase that arrives will be a welcome surprise and give you that much more breathing room to cover your costs.

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