The final numbers that will determine Social Security's cost-of-living adjustment (or COLA) for 2026 aren't in yet; they're coming in the middle of this month.
As it stands right now, however, the Bureau of Labor Statistics' data suggests the increase will be in the ballpark of 2.6%, while The Senior Citizens League's most recent expectation is for a 2.7% increase in Social Security's current monthly payments beginning next year. With the average monthly payment currently standing at $1,976, this COLA would add roughly $50 per month to that figure.
Something is better than nothing, to be sure. The fact is, however, neither projected increase is particularly thrilling. Like most prior COLAs, it doesn't seem like this one is going to fully keep up with seniors' actual ever-rising living expenses. The future isn't apt to be any different either.
I'm not too worried about tepid cost-of-living adjustments when it's finally my time to collect Social Security, though. See, I've got a plan. Here are my plan's five key components, in order of importance (although they're all pretty important).
1. Owning the right dividend stocks
If your priority in retirement is ensuring a reliable income -- which it will be for most people -- dividend stocks are a must-have. But not just any dividend stocks. You need the right ones. Sure, quality counts. So does the dividend yield at the time of your entry; bigger is better. There's much to be said for reliability as well.
More than anything, though, I'll be looking for dividend payers with a long track record of dividend growth that outpaces inflation. Names like Kroger, Coca-Cola, and, more recently, Brookfield Asset Management come to mind.
While Kroger's profit growth has only more or less matched inflation, for perspective, the grocer's generous stock-buyback program has pumped its annual per-share payout up from $0.10 to $0.35 over the course of the past 10 years. That's annualized growth of 13%, easily outpacing inflation.
Meanwhile, Brookfield believes its alternative investment management business will support yearly earnings growth of 20%, most of which will be passed along to shareholders.
2. Planning on conservatively using the 4% rule
If you're not familiar with the 4% rule, it's simple enough. Assuming a 50/50 portfolio (half stocks/half bonds), withdrawing 4% of your portfolio's value as of your first year of retirement and then increasing that dollar amount every year only by the previous year's consumer inflation rate should mean your portfolio is able to deliver that growing amount of income for 30 years.
In simulations and in the real world, the vast majority of the time, this plan works. It works so well, in fact, that some retirement planning pros have suggested it's needlessly conservative. They're saying an initial withdrawal rate of up to 6% is doable, with inflation-based adjustments in all subsequent annual withdrawals.
The only catch? Your retirement portfolio would need to be about 70% stocks and 30% bonds for that to work reliably. Moreover, your stock holdings would need to perform exceedingly and consistently well. Your bonds would need better interest rates than the ones we've seen for the better part of the past several years, too.
Given that this is one of those mistakes you can't fix if you end up getting it wrong, I'll stick with what's all but proven to work rather than taking a shot at what could work. Heck, in "down" years, I might even make a point of tightening my belt and taking out less than the 4% plan says I'm allowed to, just to make sure I'm not selling too many stocks at temporary lows.
I want to be as fully exposed to any market recovery as I can be, which, in the long run, makes my portfolio last longer and capable of generating more income in the future.
3. Creating time-based buckets
Just for the record, you don't really need specific buckets to make this approach work -- you can achieve the same in a single portfolio. Different buckets just make it easier to get and keep a handle on the idea.
But what is it? Simply put, you'll want to separate your investments into distinct time-based buckets, each with its own goal or purpose. For instance, your short-term bucket might hold the two years' worth of cash you're suggested to always hold in retirement, while an intermediate-term bucket could hold safer cash-generating dividend stocks that also have the potential to produce some capital gains.
Your long-term bucket could hold nothing but growth stocks that you won't want or need to touch for several years. It's mostly a psychological thing, yet helpful all the same.
Image source: Getty Images.
As was noted, you don't necessarily need separate accounts for all your buckets, particularly given that you'll regularly be moving cash and assets from the long-term to the mid-term bucket and from the mid-term to the short-term bucket. Separating your investments like this, however, really helps you remember that you have more than one goal in retirement and should accept an appropriate amount of risk and volatility for each individual bucket.
4. Being flexible about it
That said, I'm smart enough to know that something unexpected (like a global pandemic, a subprime mortgage market collapse, or uncontrollable inflation) can and likely will materialize at least once in my golden years. It may well happen more than once, in fact. I just don't know what it will be or when it will happen. That's why I'm not unquestioningly adhering to these three strategies if and when it becomes clear that doing so will mean my portfolio's income may be unsustainable.
As for what I might change, that's just it -- I can't say. I'd have to make a reasonable assessment of the nature and probable timeframe of the calamity in question before knowing what sort of adjustment I might need to make. I just know that I'm willing to adapt as necessary.
Potential examples of these changes include switching out some of my dividend stocks with bonds sporting sky-high interest rates or changing the targeted size, goal, or risk tolerances of my buckets. I might even decide to work again, if that's what buys me time when I need it most.
5. Making the most of my cash
Finally, one of the easiest ways any retiree can start fending off the impact of inflation and subpar COLAs as soon as today is by parking less money in a traditional bank account and holding more of their cash at brokerage accounts or online banks that offer far higher interest rates than most banks' checking accounts or savings accounts. As of the latest look, many of these accounts are paying on the order of 4% per year.
There is something of a catch. That is, this money isn't a demand deposit like a savings or checking account. If you want to turn it into cash you can spend or write checks on, you'll need to give your bank or broker explicit instructions to sell these higher-yielding money market funds. This money often won't become available until the next business day. And it could also take another day to transfer it from one account to another, if you need to do so to access it.
Nevertheless, for an inflation-beating 4%, I'll gladly go to the extra trouble.
