How Retirees Should Budget When Social Security COLA Is Lower Than Expected
Written by
Jordan Rosenfeld
Edited by
Melanie Grafil
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People who rely upon Social Security income in retirement frequently look forward to the next year’s cost-of-living adjustment (COLA), but this amount varies significantly from year to year.
Between 2023 and 2024, the COLA went up 3.2%, but projections for 2025 pin it at being somewhere between 2.6% and 2.9%, which isn’t as robust and, for some people, will be a disappointment.
“Consumers are still wrestling with double digit food prices and high gas and utility inflation, so [a] 2.6% [COLA] will not make those costs better to deal with,” said Chuck Czajka, certified Social Security claiming strategist (CSSCS) and founder of Macro Money Concepts.
Czajka explained that core inflation is defined as changes in prices — excluding food and energy prices — that tend to be volatile in nature. “The consumer price index is the core indicator to set inflation numbers,” he said. “It’s hard to say how much of an increase would allow Social Security recipients to keep up with real inflation. With fuel and food prices so high, 2.6% is not enough.”
What are Social Security recipients to do when the COLA is less than they expect and less than they need? Experts offer some tips.
Don’t Spend the Increase
One way to handle a lower than hoped for COLA is not to budget for it, Czajka said. “If they could not spend the little increase and save it, that would be a help for the future.”
He added that continuing to save money in retirement is also very important. “When a person retires, nothing else retires. They have to save in retirement for the play checks, as my friend, Tom Hegna, puts it. Saving 10% to 15% of what they take in would be a great start.”
Create a Spending Budget
It’s important in retirement to create a spending budget and stick to it, said Krisstin Petersmarck, a retirement income certified professional and certified national Social Security advisor. “It is a common behavior to impulsively buy things we may not actually need. If you have a budget in place, you can eliminate the frivolous expenditures,” she said.
On that note, Taylor Kovar, CFP, owner and founder of 11Financial, suggested Social Security recipients take a close look at their expenses and identify areas where they can cut back. “Prioritize essential bills and find alternatives for discretionary spending,” he said.
Reduce Luxury Spending
As part of that spending budget, retirees need to be realistic about what constitutes “extra” spending, or as Petersmarck referred to it, “luxury” spending.
She said, “If you go out to eat on a regular basis, cook more meals at home. If you go golfing three times a week, consider only golfing once per week.”
Always Make a Shopping List
It can be difficult to realize in retirement that you can’t shop the same way as you did when you were working.
“Before you go shopping, make a list of what you need and stick to only buying what’s on the list,” Petersmarck urged.
Take Advantage of Your Age
While there are many frustrating things about getting older, don’t forget the perks, Petersmarck said. “Many companies offer discounts for senior citizens. Use them.”
These include everything from groceries to entertainment, and even some bills or services. It might take a little research to find them, but it will be worth the discounts.
Rebalance Your Portfolio
If you haven’t taken a look at your retirement accounts or other investments in a while, it’s a good time to see if they’re working well for you or not, Petersmarck said.
“Work with a financial advisor who specializes in retirement planning,” she said. Rebalancing might be necessary to maximize your funds.
Take On a Side Hustle
If you still have the energy and interest to take on work, Kovar suggested considering options like freelance work, pet sitting or tutoring, which can be done on a flexible schedule.
“For instance, offering virtual tutoring sessions in a subject you’re knowledgeable about can generate extra income without a long-term commitment,” he said.
Overall, Kovar recommended, “Be prepared to adjust your spending habits annually rather than relying on a set COLA increase. Planning for the unexpected can provide a sense of security in retirement.”
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