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

In theory, Social Security's regular cost-of-living adjustments (COLAs) offset the impact of inflation on retirees' benefits. In reality, however, it never seems to quite work out this way for the program's beneficiaries.

The Senior Citizens League reckons that between 2010 and 2024, the average Social Security recipient's monthly buying power actually fell by $370. Blame seniors' higher healthcare costs, mostly.

Rather than simply lamenting the unfairness of the matter, though, I'm taking actions now that will help me in the future and making plans that will matter when the time comes.

Here's a rundown of what I'm doing about inflation that you can do for yourself as well.

Now

Social Security's annual COLAs are based on the Bureau of Labor Statistics' third-quarter measure of consumer inflation. If there's no inflation recorded for a particular year, there's no COLA (there's never a decrease, either).

For years in which there is measurable inflation, however, that COLA is applied beginning in January of the following year. Last year's inflation rate for COLA purposes was 2.8%, for perspective, increasing the average monthly Social Security payment by $56 to $2,071. Not bad, but certainly not adequate, either.

Fortunately, there are several actions you and I can take to combat these tepid benefit bumps.

Chief among them is looking beyond Social Security and investing money in a dedicated retirement fund. Although it can vary wildly from one year to the next, the stock market's long-term average annual gain is still roughly an inflation-beating 10%.

This is easier said than done, particularly in today's economy when it seems as if everything is getting more expensive and paychecks rarely seem to go far enough. Most households have so little left over at the end of the month that it seems pointless to bother saving so little.

But even a little can go a long way when given enough time. Earning an average annual gain of 10% on $1 would only leave you with around $2.60 at the end of 10 years, for instance. After 20 years, though, this investment would be worth $6.70. And after 30 years, this $1 investment in the market would be worth $17.50. You just need to use as much time as you possibly can, to your full advantage.

Image source: Getty Images.

Being able to tuck away more money along the way certainly couldn't hurt, either. That's why I'm constantly looking for ways to cut unnecessary expenses with a specific savings goal in mind.

I've already trimmed down the number of streaming services I subscribe to. So, my goal this year is to free up an extra $100 per month on the food front, starting with an honest assessment of how much of my household's groceries go bad before they're consumed. A 2024 survey by the not-for-profit MITRE, which manages federally funded research, and Gallup suggests the average U.S. household wastes more than two pounds of food per week. And I'd be willing to bet mine is no exception. We'll see.

In the meantime, I've found a couple of great online sources for coupons. I'm checking my mail more carefully for coupons as well, even though I know I won't use most of them. But I'll be interested in enough of them to make this effort worth my while.

In the future

Although I intend to always own at least a few stocks, I know I won't want to hold as many in retirement as I own now. I'll need to stick with safer equities then, too, and I'm sure I'll be using bonds and other debt-based instruments to generate at least a portion of my retirement income.

Contrary to a frequent suggestion, though, I'm not so sure I'll be buying any Treasury Inflation-Protected Securities (TIPS) when this time comes. Don't get me wrong: I appreciate the premise of a government-backed bond that's explicitly designed to never lose value due to inflation.

But my chief issue with TIPS is that they're also effectively guaranteed to never outpace inflation, either. I think I can do better buying other reasonably safe bonds with interest yields better than the typical inflation rate.

My broad plan is to build a so-called bond ladder that staggers my bonds' maturity dates, diversifying my interest rate risk as a result. I intend to heavily tweak my bond ladder if and when merited, too. If I can lock in an unusually strong yield, I'll overweight that particular bond issue even if it means one of the other rungs of my bond ladder goes missing.

That's because most of my fixed-income investments are apt to be longer-term holdings that I'll never actually be interested in selling. I also expect to have enough time to manage any prolonged decline in interest rates.

But I'm willing to take that risk because I'll also be doing something else at that time. I also plan to own well-proven dividend stocks with a long history of payout increases that at least keep pace with inflation.

I know this is technically riskier than owning bonds, but the dividend payers I have in mind are really boring but very durable businesses. Not every dividend stock will be good enough for this purpose.

Doing something -- anything -- is better than doing nothing

These are just my plans to combat insufficient COLAs once I retire and start collecting Social Security. Although I can't imagine them not working for others, you'll still want to thoughtfully map out your own current and future plans.

No matter what you end up deciding works best for you, however, keep this in mind: The biggest misstep is doing nothing at all to prepare for future inflation. Even the smallest of actions can end up making a big difference in the long run, if only because taking action creates momentum that leads to more and bigger actions that better secure your financial future.

So, just start somewhere, with plans to keep moving from there.

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