I'm Not Counting on Social Security COLAs to Carry Me Through Retirement. Here's What I'm Doing to Combat Inflation Instead

One of Social Security's best features is that its benefits are adjusted for inflation annually -- via cost-of-living adjustments (COLAs). So if you're collecting $2,000 per month now, you won't be collecting $2,000 in 20 years -- it might be more like $3,000 or $3,500 or $4,000. That can keep your purchasing power from shrinking too much.

Still, I myself am not counting on COLAs to fully protect me from inflation, and I'll soon explain why. In fact, I'm not counting on Social Security to provide most of my retirement income.

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Talking COLAs

The latest COLA, for 2025, is smaller than some might want. It's 2.5%. That's very close to the 2.6% average annual hike over the past 20 years. Here are some recent Social Security COLAs:

Source: Social Security Administration.

There's likely been very little rejoicing about this COLA. Indeed, according to a Motley Fool survey, fully 54% of respondents viewed it as insufficient, and 31% found it "completely insufficient." That's not surprising, given that as of November, the average monthly retirement benefit was just $1,925 -- or only about $23,000 per year.

The trouble with Social Security COLAs

Here's a significant problem with Social Security's COLAs. They're arguably based on the wrong inflation measure -- the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). That index is calculated by the Bureau of Labor Statistics based on changes in the average prices of household goods such as food, housing, and transportation. This measure is focused on costs borne by workers more than retirees, though.

A better measure for calculating Social Security COLAs is the Consumer Price Index for the Elderly (CPI-E), which weighs categories such as healthcare and housing more heavily. So since Social Security COLAs aren't based on more realistic retiree spending, they likely are smaller than they should be. This is a key reason I'm not counting on Social Security COLAs to help me meet or beat inflation.

The trouble with Social Security itself

Forget about COLAs for a minute -- because Social Security itself has some big problems. More money is being paid out of its coffers than is coming into them, so the program's surplus is shrinking -- and is expected to be depleted in 2035.

If nothing is done to strengthen Social Security, its trustees estimate that beginning in 2035, beneficiaries will receive only 83% of what they're due. Fortunately, there are lots of ways to fix this problem -- but only if Congress takes action. I'm not counting on that, but you never know.

What I plan to do about Social Security

So what am I, a not-yet-retired person, going to do about Social Security? Well, I'm going to try to get as much as I can out of it by acting on some ways to increase my benefits.

Earning as much as possible is one smart move, and trying to delay claiming my benefits is another. For most (but not all) people, the best strategy is to wait until age 70, if they can. Note, too, that the bigger my benefits end up being, the bigger increase I'll get from each COLA.

By the way, you can get a good idea of how much in benefits you can expect based on your earnings history after setting up a my Social Security account at the Social Security Administration (SSA) website.

What I plan to do for retirement income

So if I'm not counting on Social Security for much retirement income, what am I counting on? Well, a few things:

• I've been gradually shifting more of my portfolio's assets into dividend-paying stocks. I love dividends because they tend to increase over time when paid by healthy and growing companies -- often by more than the inflation rate. I'm invested in some individual companies and also a few dividend-focused exchange-traded funds (ETFs).
• I'm thinking about buying one or more fixed annuities before retiring. Doing so will generate a fairly reliable income stream.
• I'm likely going to delay retirement for a few years, so that I can try to start Social Security at age 70. That will help me build my nest egg a little more before retiring, too.
• I'm going to draft a household spending budget for retirement, so that I can better monitor my spending and keep it from getting out of hand.

What's your retirement plan? Be sure you take some time to estimate how much income you'll need in retirement and how you'll get it. Ideally, aim to set up multiple income streams for your retirement -- and expect some Social Security income, but don't count on it being a lot.

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