2 Things Retirees Are Probably Getting Wrong About Social Security's Upcoming COLA

If you're among the millions of older Americans who collect Social Security each month, you may have been eager to learn what the 2027 cost-of-living adjustment, or COLA, would be.

In case you missed the news, the official 2027 COLA is 3.6%. And that's a much larger raise than the 2.8% COLA that hit Social Security benefits this past January.

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But before you start making financial plans for the new year that revolve around a 3.6% COLA, it's important to understand a couple of key things. Here are two aspects of the upcoming COLA many retirees risk getting wrong.

1. It's a great way to get ahead financially

It's common to think of Social Security COLAs as an annual raise. But what they really are is a form of catch-up payment to make up for higher costs.

Social Security COLAs are directly tied to inflation – specifically, the Consumer Price Index for Urban Wage Earners and Clerical Workers. They're also based on inflation data from the third quarter of the year.

The 3.6% COLA that's set to reach benefits in January is based on price increases from July, August, and September. So while you might think a boost that large will improve your finances tremendously, it probably won't. All that COLA is meant to do is increase your Social Security checks enough to keep up with the cost increases that just occurred.

2. It's a raise everyone gets to keep in its entirety

You might assume that your Social Security COLA is yours to keep in full. But if you're on Medicare, you should expect to lose a portion of it if the cost of Part B increases.

Seniors who are enrolled in Social Security and Medicare at the same time pay for Part B premiums out of their Social Security benefits. So if the upcoming COLA raises your Social Security checks by $68 a month, for example, but the cost of Medicare Part B rises $11 per month, your net gain will be $57 per month. That's an important thing to know before you attempt to create a 2027 budget.

You may be excited to get a 3.6% Social Security COLA in 2027, especially given this year's much smaller increase. But do be aware that you may not get ahead financially once that increase hits, and that you may not get to keep every dollar of it if the cost of Medicare Part B goes up yet again.

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