How to prep your budget now if the 2027 COLA comes in below expectations

In most years, Social Security provides a cost-of-living adjustment (COLA) to help ensure that benefit recipients can maintain their buying power. Prices increase over time because of inflation, and without COLAs, benefit payments over time would not go as far.

The official COLA announcement comes in October each year, but because of the importance of these benefit increases for seniors, experts estimate the upcoming benefit change throughout the entire year. Early estimates for the 2027 COLA have suggested that seniors could be in for a large increase.

But what happens if that doesn't pan out? How can seniors begin preparing now for the possibility that the COLA will be much smaller than expected?

A disappointing 2027 COLA remains a very real risk

The reality many retirees must face is that the early projections for a large Social Security COLA may not pan out. Those adjustments are based largely on inflation estimates from January through May, and none of the currently available inflation metrics are actually used to calculate the COLA.

The actual 2027 Social Security benefit increase will be based on year-over-year changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), and it is July, August, and September data that matter. While the numbers experts are currently using to estimate the 2027 COLA do show trends in inflation that affect the numbers, those trends can also shift rapidly with changing economic conditions.

For example, the most recent COLA estimates that suggest a 3.8% to 4.7% COLA is on the table are based largely on CPI data from May that was published by the Bureau of Labor Statistics. But while this data showed a 4.2% year-over-year increase in the Consumer Price Index for All Urban Consumers (CPI-U), the bulk of the increase was driven by rising energy prices, which accounted for more than 60% of the monthly all-items increase.

If the high inflation levels driving the COLA predictions turn out to be transitory effects of the Iran conflict that resolve when the conflict does, inflation could easily decline. Those collecting benefits whose retirement planning baked in the idea of a big raise could find themselves getting far less than expected if that happens.

How can you prepare your budget for a smaller-than-anticipated COLA?

The best way to prepare your budget for a smaller-than-expected raise is to simply not rely on the benefit increase coming.

COLAs happen in most years, but are far from guaranteed. In some cases, they only provide a very small amount of extra money each year. Medicare premiums can also eat up the extra income a COLA provides. So, you cannot ever base your spending plans on the hopes of a big raise coming.

Instead, consider what a safe withdrawal rate is from your 401(k) and other retirement plans. Make sure you understand the income coming from those accounts, and strive to live within your means with that income plus the Social Security benefit you're already collecting. Then, any COLA you get will end up being a bonus.

While a smaller COLA could mean your Social Security doesn't grow as much, it's also worth remembering that your other retirement income sources likely don't have inflation protections built in. So, your IRA, 401(k), or other investment accounts won't be hit as hard if inflation ends up stabilizing. This could offset some of the "loss" of the big Social Security benefit raise you were anticipating.

The reality is that COLAs are calculated based on how inflation is measured. If your COLA comes in lower than anticipated, this means that costs won't be as high, and you may not have major budget shortfalls.

Still, if you find that your projected Social Security without a big COLA and your distributions from retirement plans won't provide the funds you need, it's time to consider exploring other options. These could include meal planning and cutting coupons, scaling back vacation plans, and tracking spending to identify other cuts.

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