Why you can’t count on your Social Security COLA in retirement – and what to do instead

Right now, we’re just days away from a 2025 Social Security Cost of Living Adjustment (COLA) announcement. And if you’re someone who gets most of your senior income from Social Security, you may be anxious to know how much your monthly benefits will increase in the new year.

But relying on your Social Security COLA is not a great way to function in retirement. In fact, you should know that while those COLAs are designed to help seniors maintain their purchasing power as inflation increases the cost of living, they often fail miserably.

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Last year, the nonpartisan Senior Citizens League revealed that Social Security recipients have lost 36 percent of their purchasing power since 2000. And a big reason comes down to how those COLAs are calculated.

The Social Security COLA is based on changes to the Consumer Price Index for Urban Wage and Service Workers (CPI-W). But the CPI-W doesn’t do a great job of capturing costs that are specific to older people. And all you have to do is read the name of that index carefully to see why.

Social security beneficiaries, by their nature, are not employees. Agreed, it is possible to work and collect social security at the same time. But for the most part, those receiving benefits are retired from their jobs.

And social security recipients don’t necessarily live in urban areas. So until a new method of calculating COLA is introduced, Social Security recipients will continue to lose purchasing power.

That’s why it’s important to have a retirement strategy that is less dependent on COLA. Here are some ways to achieve this.

1. You have external savings

Social Security will only replace about 40% of your pre-retirement salary if you earn a normal income. Therefore, even as the COLA determination system improves, it is a good idea to have external savings to draw upon.

Contributing consistently to an IRA or 401(k) plan throughout your career could put you in a nice place savings-wise if you invest your money in stocks, which have a history of producing strong returns. A monthly contribution of $400 over 30 years, for example, could result in a portfolio worth about $544,000 if we apply an 8% annual return over that period, which is a step below the market average of values.

2. Invest in assets that provide continuous income

It’s important to set yourself up with a steady retirement income in addition to Social Security. To that end, aim to own investments that not only potentially gain value, but also pay out regularly.

Municipal bonds are a good fit for this. They are considered a fairly stable investment, and the interest they pay is not subject to federal taxes. You may also want to consider holding REITs or real estate investment trusts in your portfolio as a senior, as they are required to pay out at least 90% of their taxable income to shareholders in the form of dividends.

3. Be careful about your expenses

Some people spend in retirement the same way they spend throughout their careers. But that only works if you have a comparable amount of income.

If you’re looking at a lower income in retirement, that’s understandable. But it also means you may need to adjust your spending to avoid financial stress.

Consider whether you need to keep the home you raised your family in or whether it’s worth downsizing for the savings involved. Similarly, think about where you live.

A bigger, more expensive city may have made sense while you were working because of the access to jobs it gave you. If you’re no longer working, moving to a less expensive part of the country can help you better stretch your retirement income overall.

COLAs from Social Security should do seniors a favor. The unfortunate reality, however, is that they often fall short of this goal. Preparing to be less dependent on those COLAs could make the difference between financial peace of mind in retirement versus years of money worries.