Is Your Retirement Plan Ready to Stay Ahead of Inflation Next Year?
On October 14th, the Social Security Administration announced the highest cost-of-living adjustment (COLA) since 2023: a 3.6% benefit increase for 2027. That's about an additional $900 for an average retiree over the course of next year.
Any extra support for retirees is good news. But Social Security's annual COLA announcement is also an annual reminder that there's more to managing retirement than how big your nest egg is. Your cash flow and investments have to account for various fluctuations in the economy to maintain your purchasing power and secure your preferred lifestyle for decades to come.
On today's show, we discuss COLA, the latest inflation data, and the distinct roles that interest rates, bonds, and stock returns play in a comprehensive retirement plan.
The COLA Formula
To calculate the annual cost-of-living adjustment, the government uses the Consumer Price Index for Urban Wage Earners and Clerical Workers. The CPI-W averages the inflation data from July, August, and September to determine how large the following year's benefit adjustment should be to cover increased costs of a typical "basket of goods and services."
However, as you might guess from the name, the CPI-W metric tracks the spending habits of working urban professionals rather than retired individuals.
A typical retired person’s "basket of goods and services" looks very different, including higher healthcare costs, which often inflate much faster than standard consumer goods.
In fact, AARP polling suggests that a 5%-to-8% benefit increase would more accurately reflect the true cost increases that retirees face.
The good news is that Medicare Part B premiums are only expected to rise around $6.60 per month next year. So rising health care costs probably won't swallow all your 2027 COLA.
Inflation Across Retirement
So, if we can't rely on COLA to accurately reflect how much inflation and other economic factors drive up costs for seniors every year, what numbers should we use?
When my team at Keen Wealth is modelling a typical senior's retirement cash flow, we typically assume that standard living expenses will inflate by 3% every single year.
But our projections also include a 6% annual increase in health care expenses as well, because those costs tend to rise faster than the cost of consumer goods and services.
Most importantly, my team also takes a long view of how senior spending typically falls and then rises throughout the various stages of retirement:
The "Go-Go" Years: The first decade of retirement is often the most expensive due to travel and active living. However, overall spending is beginning to decline because of reduced costs elsewhere, like work expenses, debt repayment, and raising kids.
The "Slow-Go" Years: As retirees slow down and travel less, core spending often continues to decrease.
The "No-Go" Years: In the final years of retirement, reduced lifestyle spending is often replaced by a sharp increase in long-term care or assisted living expenses.
So, while seniors have to be prepared to cope with steady inflation, a comprehensive financial plan has to account for this "retirement spending smile" too.
What Are Stocks and Bonds Really for?
You'll read a lot of varying opinions from "financial gurus" about whether your portfolio should lean more towards stocks or bonds in retirement, especially when it comes to "hedging" against inflation.
And some seniors have strong feelings on this issue as well. You might prefer stocks because, historically, they earn a higher return on investment. Or, you might prefer the predictability and stability of bonds, especially as you look for more security in the later stages of retirement.
But if you're just focused on inflation, you might overlook a more important question: What distinct "jobs" are each of your investments supposed to perform?
Based on historical rates of return, a diversified portfolio of stocks is a good tool to outpace a typical 2-3% annual rate of inflation. The companies that you're investing in have pricing power, which they can use to maintain or increase revenue when the costs of labor and materials go up. More revenue means higher corporate earnings and a higher return on investment for shareholders.
For example, let’s say you made a $10,000 investment in the S&P 500 way back in 1976, and compared it with the income available on $10,000 using historical 10-year U.S. Treasury yields.
Using the year-end 1976 Treasury yield, $10,000 would produce $687 in annual interest.
Using the year-end 2025 Treasury yield, that same $10,000 principal amount would produce $418 in annual interest. These figures compare income available at those yields, rather than actual payments from a series of bonds held over the period. An individual Treasury note’s interest payments remain fixed until maturity.
A $10,000 investment in the S&P 500 would have paid you $468 in stock dividends during 1976.
If you never added another dime to the account, and simply lived off the dividends for the next 50 years without reinvesting them:
During 2025, your portfolio would have earned nearly $9,000 in dividends for that single year.
At the end of 2025, your initial $10,000 investment would have grown to almost $760,000.
However, that doesn’t mean stocks are “better” than bonds.
Bonds aren’t supposed to be the main growth engine of a portfolio. They’re supposed to provide a baseline of stability that, along with cash reserves, maintains a buffer of liquidity that you can lean on when the markets experience volatility, or when your lifestyle needs suddenly change. Bond values can fluctuate before maturity, just as stock values and dividends can fluctuate.
So:
If you don’t have a diversified portfolio of stocks building your wealth, your purchasing power may erode over time.
And if you don’t have a buffer of bonds and liquidity providing a baseline of stability, you might struggle to adjust to the ups and downs of the markets, the global economy, and most importantly, your life.
Stocks and bonds are both just tools. The ideal mix depends on you, your short-term needs, and your long-term goals.
Providing for Today, Preparing for Tomorrow
I know you’re seeing a lot of big numbers in scary headlines right now: inflation rates, cost of living increases, gas prices, market fluctuations, higher national debt.
But none of those numbers is more important than what you want to accomplish in retirement.
And, with comprehensive planning, none of those numbers should prevent you from enjoying your life today, securing your needs for tomorrow, and creating a lasting legacy.
We can stress-test your 2027 financial plan against inflation, your health care needs, and anything else that’s on your mind at your annual review meeting. Get in touch and let’s schedule some time before the holiday rush.
This illustrative historical comparison is for educational purposes only and does not represent the performance of Keen Wealth Advisors or an actual client account. It covers January 1976 through December 2025 and assumes interest and dividends are withdrawn rather than reinvested. Stock ending values reflect price appreciation only. Treasury income figures apply the respective year-end 10-year Treasury yields to a constant $10,000 principal amount; they do not represent actual payments from a bond held throughout the period.
The S&P 500 is an unmanaged index that cannot be invested in directly. Stocks and Treasuries have different risks and characteristics. Stock values and dividends fluctuate, and dividends are not guaranteed. Treasury market values fluctuate before maturity, and rates available when reinvesting principal may change. The selected period may not reflect results over other periods. Past performance does not guarantee future results. This material is not individualized investment advice or a recommendation of any particular investment or strategy.
Sources: Aswath Damodaran, NYU Stern historical data, through December 31, 2025. The approximately $8,712 dividend figure uses NYU’s estimated 2025 dividend data.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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