Don’t Count on Social Security COLAs to Help You Keep Up With Rising Costs. Do This Instead

You’ve probably noticed that in recent years, it’s gotten more expensive to buy groceries, eat at a restaurant, or replace articles of clothing. It’s not just in your head.

Inflation has been rampant since 2021, and it’s made life more expensive for people of all ages. But even during periods of moderate inflation, as opposed to the in-your-face inflation we’ve all been dealing with lately, many retirees tend to struggle to keep up with living costs.

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It’s common for retirees to end up living on a fixed income that’s a combination of withdrawals from savings and Social Security. And over time, they risk losing buyer power.

Thankfully, Social Security benefits are protected against inflation to some degree. That’s because they’re eligible for an annual cost-of-living adjustment, or COLA.

The sad truth, though, is that Social Security’s COLAs have long failed to help retirees maintain their buying power. That’s why it’s important not to count on them too heavily to beat inflation, but rather, to take matters into your own hands.

The problem with Social Security COLAs

Social Security COLAs are based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But all you need to do is look at the name of that index to see why it’s flawed system.

Many Social Security recipients do not fall into the category of wage earners or clerical workers. Many also don’t live in urban areas, either. As such, the CPI-W often does a poor job of capturing the costs Social Security beneficiaries face.

It’s perhaps for this reason that Social Security COLAs have long failed seniors. The Senior Citizens League, an advocacy group, says that Social Security benefits lost 20% of their buying power between 2010 and 2024. If this trend continues, it could get even harder for retirees to keep up with rising expenses.

In fact, advocates have long been pushing for a better way to calculate Social Security COLAs. Ideally, they’d like to see those annual raises be based on the Consumer Price Index for the Elderly, or CPI-E — an index that would be more reflective of the costs faced by people who collect benefits from Social Security, as opposed to people who are still holding down jobs.

A better way to protect yourself from inflation

Since it’s not a good idea to count on Social Security COLAs for true protection against inflation, you should take matters into your own hands by investing your savings for growth. If your IRA or 401(k) is able to continue generating strong returns during your retirement, you may have an easier time keeping up with inflation through the years.

Stocks have long done a great job of outpacing inflation. But they’re also very volatile. And at a time when you may be tapping your retirement account for income, it’s unwise to have all of your money in the stock market.

However, it’s a good idea to have a portion of your nest egg in the stock market. And within that category, you can split your assets between growth and dividend stocks.

The growth stocks, though risky, might generate substantial gains for your retirement portfolio over time. The dividend stock portion may be less volatile, allowing for a better balance. And the dividends you receive can help offset potential losses during periods when the market is in a decline.

Although Social Security’s COLAs are supposed to help safeguard seniors from inflation, they haven’t been cutting it. Rather than bank on those COLAs for your retirement, create an inflation-beating portfolio that helps ensure that you’re able to keep up with your expenses from year to year.