Social Security's 3.6% COLA may fall short for retirees. How advisors can help

• Key insight: Benefit increases mask a widening purchasing power gap for retirees, as cost-of-living adjustments often fail to keep pace with inflation.
• Supporting data: The 3.6% COLA set to start in January 2027 lags the 3.7% CPI-U inflation rate for the 12 months ending in September 2026.
• Expert quote: "This is a free reason to call your clients and demonstrate the value you're adding." — Sri Reddy, Principal Financial Group

Today the Social Security Administration announced the largest cost-of-living adjustment since 2023, but for retirees, the benefits bump is unlikely to keep up with inflation. For advisors, it's an opportunity to review retirement income plans, assess how rising costs affect budgets and discuss potential spending adjustments. 

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The 3.6% COLA will take effect in January 2027 for nearly 72 million beneficiaries and will translate to an average monthly benefit increase of $75. It is likely to lag inflation as measured by the consumer price index for all urban consumers (CPI-U), which rose by 3.7% for the 12 months ending in September. Both the COLA and CPI-U were announced Oct. 14. Last year's COLA bump was 2.8%. 

If inflation outpaces the COLA, beneficiaries lose purchasing power. In 2026, spikes in Medicare premiums eroded the Social Security COLA, and Medicare premiums are usually deducted directly from Social Security checks.

COLA announcements can create natural openings to talk with clients about how their retirement income is holding up against rising costs. 

"This is a free reason to call your clients and demonstrate the value you're adding," said Sri Reddy, Principal Financial Group's senior vice president of retirement and income solutions.

Advisors should review what portion of clients' monthly income comes from Social Security and discuss whether their plans need to change based on the COLA news, he said.

"Do you want me to match a Social Security adjustment for COLA, or do you want to keep it level because you feel like you can save money elsewhere, or do you need more for some other reason?" Reddy added. "It's just a great conversation to have and also while reminding them how their account has done and overall performance of the relationship."

Those conversations can extend past income projections to practical cost-saving considerations, he said. Clients might consider buying ground turkey instead of beef, traveling during off-peak times or visiting Brussels instead of Paris, for example.

The SSA bases the annual COLA on a different calculation of CPI, the consumer price index for urban wage earners and clerical workers (CPI-W), which rose by 3.9% over the previous 12 months — an even higher rate than the CPI-U.

Executive Director Shannon Benton of the nonprofit, nonpartisan Senior Citizens League said in a statement ahead of the announcement that seniors would likely be disappointed with the COLA over the long term.

"Older Americans allocate their budgets differently than people still in the workforce, so inflation hits them differently," she added. "The CPI-W captures the experience of urban wage earners, which doesn't represent the average senior's budget."

The annual cadence of the adjustments also creates challenges and "puts life on hold for a lot of seniors," Benton said. "When prices rise, they don't rise next January when your benefit check goes up. They rise right now."

What the COLA means for clients' retirement budgets

Rather than focus on the headline percentage, advisors should help clients understand what the COLA means for their individual budgets, said Matthew Smart, chief investment officer of Chicago-based wealth management firm WWM Investments.

"Don't spend too much time, as a recipient of Social Security, on the headline number," Smart said. "You always have to go back to a financial plan and do our best to do the projections. An increase is good, but when you put these percentages in dollars, sometimes, it makes you feel a little bit different, right? Some people might say, 'Oh, man, an extra $73 a month. That's going to actually cover the physical therapy that I'm doing,' or something like that."

The impact depends on how clients spend their money. The COLA will likely fall short for those whose budgets are overloaded with expenses like healthcare.

"If your living expenses are more heavily comprised of the faster growing expense items — say healthcare, for example — then your COLA increase will not cover the entire increase in living expenses," Greg Welborn, principal at Pasadena, California-based financial planning and investment management firm First Financial Consulting, told Financial Planning in a statement.

In contrast, retirees whose expenses are more heavily weighted toward rent or fixed-rate mortgage payments and groceries may fare better.

"Take a nuanced view of your living expenses, and be prepared to make adjustments in key areas, not just across the board," he said.

Introductory bullet points created by AI with editorial review.