Most current or near-retirees on a budget will want to take at least some action now.
If it feels like you’ve seen and heard the word “COLA” quite a bit in the past two months, you’re not crazy. You have. The Social Security Administration announced its COLA for the coming year in mid-October. It will go into effect at the beginning of the coming year. Plenty of people have been discussing it lately.
The news and noise, however, begs a two-part question from investors: What the heck is a COLA, and should you care?
The answer to the second half of the question is, yes, you should — especially if you’re retired, or if retirement is nearing. As to the first half of the question, keep reading.
Social Security’s COLA for 2025
Getting straight to the point, COLA is an acronym for cost-of-living adjustment. Just as the name suggests, these are adjustments in the size of recurring payments being made to an individual that reflect the impact of inflation. More specifically, cost-of-living adjustments are increases in payments that help recipients sustain their buying power.
Several types of entities, including insurance companies and pension plans, routinely implement cost-of-living adjustments. Perhaps no organization’s yearly COLA is as closely watched, however, as the Social Security Administration’s. After all, more than 70 million people receive Social Security benefits of some sort, with the majority of them collecting ordinary retirement benefits (as opposed to disability). This makes the program the United States’ single-biggest retirement plan. And for four out of 10 beneficiaries, Social Security is their top source of income in retirement. For some, in fact, it’s their only meaningful retirement income.
So yes, these annual COLAs matter.
Image source: Getty Images.
As for 2025’s cost-of-living adjustment, beginning in January retirees collecting Social Security benefits will see 2.5% more per month than they’re collecting now. Given the program’s average monthly payment of $1,918, the impending monthly benefit should swell to $1,966 — a $48 improvement. The adjustment is relative to your current payout, however, so those enjoying greater benefits will see a bigger absolute increase. Those beneficiaries receiving smaller payments will see a little less net improvement.
For everyone, though, the upcoming COLA will be 2.5% more than they’re collecting now, reflecting this year’s overall inflation rate.
Action time
Not enough? If that’s your opinion, you’re not alone. A recent poll by The Motley Fool indicates that slightly over half of retirees believe this 2.5% increase is insufficient. This crowd argues that the COLA doesn’t fully cover the recent increases in food prices, utilities, or housing. The upcoming improvement to monthly payments also doesn’t reflect older Americans’ growing healthcare costs, which can be particularly pronounced at this advanced age. Indeed, the Senior Citizens League argues that U.S. retirees have lost $370 worth of monthly buying power just since 2010 due to inadequate cost-of-living increases.
Regardless, what retirees get from Social Security is what they’ve got to work with. They must find a way of making it work.
With that as the backdrop, here are three actions retirees can take to overcome the adverse impact of lackluster cost-of-living adjustments.
First, consider making your cash more productive. Although there’s no denying most banks are paying more on money held in checking accounts and savings accounts than they were just a couple of years back, they’re still not likely paying the kinds of rates you’ll see on true money market funds. While these funds aren’t automatically “swept” and require explicit instructions to convert them into cash, with annualized yields of between 4% and 5%, they’re arguably worth a little additional trouble.
Second, although you typically don’t want to be forced into making such moves in a hurried panic, you may want to consider shifting some of your higher-yielding dividend stocks into dividend payers that might pay less, but with track records of dividend growth that outpaces inflation.
Again, it’s easier said than done. You’re likely living on this dividend income now. Making such a switch could lower your current investment income even if it sets the stage for COLA-beating dividend increases in the future. This might need to be done in stages, with some careful planning. It’ll be worth the effort in the long run, though.
And third, if a 2.5% cost-of-living adjustment just isn’t going to cut it for you, then the most obvious action you should consider taking sooner rather than later is cutting expenses where you can.
This may or may not be easy to do. It could force you into making some tough decisions about whether something is a “want” or an actual “need.” Not all of your cost-culling needs to be difficult, though. Many older Americans lament spending money for any length of time at all on things like unnecessary insurance, deluxe mobile phone plans, a second automobile, or even additional costs stemming from simply not taking advantage of senior discounts.
Regardless of which of these three steps you end up taking (or any steps not discussed here), just remember that taking even the smallest of actions is better than doing nothing at all.
