Each year, the Cost-of-Living Adjustment (COLA) — not to be confused with the globally recognized pop drink — becomes a key topic for retirees and those nearing retirement. In theory, the COLA, determined by the Social Security Administration, adjusts Social Security benefits to keep pace with inflation. This adjustment aims to help beneficiaries maintain their purchasing power in the face of rising costs.
With 2025 around the corner, many people are asking, “What is the COLA increase for 2025?” We believe that understanding the implications of this adjustment could be essential for anyone interested in effective retirement planning.
In this post, we’ll explore what the COLA increase for 2025 means for your retirement planning and provide a practical, step-by-step guide for navigating this change. From tax planning to investment strategies, we’ll cover how the COLA increase affects various aspects of your financial plan, and we will do our best to help you make informed decisions to optimize your retirement income.
What is the COLA Increase for 2025?
Before diving into the specifics of how to plan for the COLA increase, let’s first answer the question, “What is the COLA increase for 2025?” The short answer: 2.5%, or about a $50 average monthly increase. The background context behind these figures, however, warrants a little more explanation.
The Social Security Administration (SSA) bases the annual COLA on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), comparing the average CPI-W from the third quarter of the current year with that of the previous year.
If there is an increase, the SSA raises Social Security benefits to match the inflation rate. Next year’s adjustment is set to reflect the moderate inflationary pressures felt throughout the economy. While this figure varies from year to year, recent years have seen COLA adjustments ranging from around 1% to over 8%. Next year’s 2.5% figure is therefore on the lower end of the spectrum.
For many retirees, Social Security forms the backbone of their retirement income, so even a small COLA increase could make a welcome difference — or, equally, could prove insufficient, depending on other factors.
Which measure should the SSA use?
What might those factors be? Well, the increase does not, by itself, fully protect against rising expenses for the elderly, as COLA adjustments do not always match actual increases in healthcare, housing, and other essential costs experienced by retirees and those nearing retirement age.
As a result, some critics of next year’s COLA have suggested that the Social Security Administration’s methodology for calculating inflation is flawed, as it does not properly account for the needs of its target demographic.
Instead of the generalized CPI-W, they argue, the SSA should base the COLA on the experimental index for America’s elderly population (aged 62 years and older), the R-CPI-E. The Bureau of Labor Statistics started releasing values for this measure in 1982.
The Congressional Research Service found that basing the COLA on the R-CPI-E, which better accounts for health care and other more relevant spending items among the elderly, “would have equaled or exceeded the current law COLA in all but six years since 1986 (2005, 2008, 2011, 2018, 2021, and 2022).” The same research calculated that a COLA based on the R-CPI-E for 2025 would have been 3%, not 2.5%.
We believe this background context demonstrates just how important it is to find other ways to approach your finances in 2025: if the COLA proves lacking in your unique circumstances, you may need to implement other strategies, including more effective tax planning, tailored investment planning and perhaps even a return to work; any and all of those measures could help to bridge the shortfall created by a CPI-W-based COLA…
1. Investment Planning: Building a Risk-Managed Portfolio
With varying inflation levels and the potential for market volatility, the COLA increase for 2025 alone may not provide sufficient income for retirement. Investment planning could be a great way to help secure additional income, preserve your wealth, and stay ahead of inflation where the COLA is lacking.
One key strategy for retirees in this environment is what we at Iron Point Financial like to called risk-managed investments. These are relatively low-risk investments that allow you to draw a regular income, and could prove invaluable in fighting the impact of inflation.
What Are Risk-Managed Investments?
Risk-managed investments focus on balancing growth potential with downside protection. This approach aims to reduce the risk of major losses, which can be especially valuable for retirees who may not have the time to recover from significant market downturns.
Risk-managed investments are designed to generate income that can supplement your Social Security benefits, enhancing your overall retirement income plan. Your financial advisor can help you develop a portfolio that includes a good balance of these.
Beginner-Level Investment Strategies to Supplement COLA
1. Dividend-Paying Stocks and Mutual Funds
Dividend stocks and mutual funds can provide regular income through annual or even quarterly payments, allowing you to benefit from both capital appreciation and income. Many companies in sectors like utilities and healthcare, for instance, are known for paying consistent dividends.
Please note that if you choose to include these investment instruments in your portfolio, it may be advisable to diversify your selection to reduce the risk associated with individual stocks. Your financial planner can help you with this.*
*Please see important investment disclosures at the base of this article.
2. Bonds and Bond Funds
Bonds are generally safer (i.e. less risky) than stocks and offer predictable income. For retirees, a mix of government and high-quality corporate bonds could provide a stable source of income.
For an added strategic layer, and to better reap the rewards of bond investments at times you need them most, you could consider bond laddering or bond funds to more effectively balance risk and return.
*Please see important bond disclosures at the base of this article.
3. Annuities with Inflation Protection
Some annuities are bundled with inflation protection, which helps to ensure that your annuity payments rise in line with the cost of living. Annuities can provide guaranteed income for life, potentially making them an attractive option for retirees seeking stable, predictable income.
*Please see important annuity disclosures at the base of this article.
4. Alternative Investments:
For investors with a slightly higher risk tolerance, alternative investments such as real estate, real estate investment trusts (REITs), or commodities could also provide inflation-resistant income streams. These investments often have a low correlation with traditional stocks and bonds, which could reduce overall portfolio risk.
*Please see important REIT disclosures at the base of this article.
The Iron Point Difference: Next-Level Structured Notes
Most financial advisors would stop at this basic list — stocks, bonds, annuities, and even alternative investments — but at Iron Point Financial, we are determined to go the extra mile to serve our clients and their retirement needs.
A lot of the investments mentioned above come with a “safe withdrawal rate” of 3 or 4%, but we are always on the lookout for other investment solutions. That’s where structured income notes come in.
As Greg Liszka (CFP®, RICP®), President and Advisor at IPF explains,
These are income-based structured notes that could pay out a considerably higher percentage than the “safe withdrawal rate” on a monthly or annual basis, depending on the structured note in question.*
I don’t know anyone else who is talking about this.
*The exact figures change regularly; for an up-to-date quote on the return percentages offered by specific structured income notes, you would need to talk with a financial advisor at Iron Point Financial to find out more. For structured notes in particular, there are also many important disclosures, which you can find at the base of this article.
What Exactly Are ‘Structured Notes’?
Structured notes are a type of debt security sold by banks, financial institutions, or corporate borrowers. As with other fixed-income securities, investors loan money via structured notes for a fixed term. Unlike bonds and certificates of deposit (CDs), structured notes do not pay a fixed interest rate.
Hypothetical Examples of Structured Notes Investment Outcomes
Scenario 1: The Index the Structured Note is Tied to Rises
Let’s assume that the return for our hypothetical structured note is tied to the performance of the NASDAQ Index.* In our hypothetical scenario, the index rises 50% over the life of the structured product; in other words, the value of the product went up 50% between purchase date and maturity.
Let’s further assume that you made an original investment of $50,000, with an 80% “participation rate.” Under these conditions, the final return would be $20,000 ($50,000 x 50% x 80%).
That means that, at maturity, the investor would receive the amount of his or her original investment principal, plus the $20,000 index return amount, for a total return of $70,000.
*Please see disclosures at the base of this article for more information on the NASDAQ indexes and indexes more generally.
Scenario 2: The Index the Structured Note is Tied to Falls
In this second hypothetical scenario, let’s again assume that the return is tied to the performance of the NASDAQ Index and that the investor put forward an initial $50,000, but this time, the index falls 50% over the life of the structured product.
In this scenario, the investor would receive no additional returns under the “participation rate”; instead, they would be paid according to the principal return at maturity percentage (PRMP) offered by the structured product.
Assuming the PRMP was 100% then, no matter how much the overall index fell, the investor would receive a full return (i.e. 100%) of his or her original investment principal at the end of the term: $50,000 at maturity.
Scenario 3: A Capped Return
In this third and final scenario, let’s again assume the investment return is tied to the performance of the NASDAQ Index, and that, like the first example, the index rose 50% over the life of the structured product. Let’s also assume that our investor put forward $50,000 as principal, at an 80% participation rate. In this example, however, let’s assume that the structured note comes with a “cap” of 30%.
Under these conditions, the total return to the investor would be the lesser of the participation amount of $20,000 ($50,000 x 50% x 80%) OR the “cap” amount of $15,000 ($50,000 x 30%).
In this hypothetical scenario, the investor would receive the amount of his or her original investment principal plus the $15,000 cap index return amount, for a total return of $65,000.
Initial Structured Notes Disclosure*
- The examples above are for illustrative purposes only and are not intended to predict or project the performance of any investment or security.
- Taxes, inflation, fees and/or expenses were not taken into account. If they had been deducted, performance would have been lower.
- Past performance is not a guarantee of future results.
- Your performance will vary, and you may have a gain or loss if you sell prior to maturity.
- Before you start, you should review all of the assumptions for these hypothetical examples.
*For all important disclosures related to Structured Notes, please see the full list provided at the base of this article.
How Might Structured Notes Compare to the COLA 2025?
If we look back at our opening question for context (“What is the COLA increase for 2025?”), we can see that next year’s increase of 2.5% could — hypothetically — be much smaller than the potential return offered by a structured note tied to an index that successfully rose during the maturity term.
In that hypothetical scenario — with rates of return like those described in Scenarios 1 and 3 above, your final investment would considerably outpace both the overall rate of inflation and the COLA increase. To state the obvious, the hypothetical 50% in Scenario 1 and the 30% capped figure in Scenario 3 are much higher than the 2.5% COLA increase in 2025.
How to Implement Risk-Managed Investments
With all of that said, risk-managed investing still requires a careful approach to asset allocation and diversification, not to mention the fact that many of these options are unavailable to casual investors (e.g. the structured notes we have gone into depth about require special access through financial professionals like those at Iron Point Financial).
Here are a few steps to start:
- Work with a Financial Advisor: A fiduciary financial advisor like those at Iron Point Financial can help you create a balanced portfolio tailored to your risk tolerance and retirement goals. They can also adjust your portfolio as market conditions change.
- Set Clear Income Goals: Define how much supplementary income you need to maintain your lifestyle. This will help you decide the right balance between growth-oriented and income-oriented investments.
- Regularly Reassess Your Strategy: Market conditions and personal circumstances can change, making it important to regularly reassess and adjust your investment strategy to meet your income needs.
By building a risk-managed portfolio, you can supplement your Social Security income and maximize the benefits of the COLA increase for 2025. This could provide additional financial help, especially in an inflationary environment.
2. Returning to Work: The ‘Unretirement’ Strategy
For many retirees, the COLA increase for 2025 may not fully offset the rising cost of living, and even your investment portfolio may not be enough to tide you over in the short-term. As a result, you might consider “unretiring” (returning to work), either part-time or full-time.
‘Unretirement’ is becoming increasingly common as people live longer and seek additional income to sustain their lifestyle. Here’s how you can navigate the return to work in a way that complements your Social Security benefits and the COLA increase.
How Employment Affects Social Security Benefits
If you return to work after you have already started receiving Social Security benefits, it is important that you understand how your new income stream could impact your benefits for the time you remain in work:
- Full Retirement Age (FRA)
If you haven’t reached your FRA (which varies based on your birth year), working may temporarily reduce your Social Security benefits if you exceed the annual earnings limit.
For 2025, the earnings limit will be approximately $20,000 to $21,000. If you exceed this limit, $1 will be deducted from your benefits for every $2 earned above the threshold.
- ‘Unretirement’ After FRA
Once you reach your FRA, you can work without affecting your Social Security benefits, no matter how much you earn. Any benefits previously withheld due to exceeding the earnings limit are recalculated and adjusted.
Steps to Consider Before Returning to Work
- Understand How Much You Need to Earn: Before jumping back into the workforce, estimate how much additional income you need to maintain your desired lifestyle. This will help you determine if full-time or part-time work is right for you.
- Evaluate Potential Health and Lifestyle Benefits: Many people find that working provides structure, social interaction, and a sense of purpose. If you’re considering unretirement, think about jobs that align with your interests, and don’t add excessive stress.
- Coordinate with Social Security Benefits: Carefully plan your work schedule and income to avoid inadvertently reducing your Social Security benefits. This may include limiting your hours or choosing a job that allows you to stay within the earnings limit if you haven’t reached FRA.
Returning to work can help supplement your income, making up for any shortfall related to the COLA increase for 2025. However, a careful approach is essential to avoid complications with Social Security benefits and ensure a smooth transition back into the workforce.
3. Tax Planning: Minimizing the 2025 COLA's Impact
Our third and final area for consideration in relation to the COLA is tax planning. So far, we’ve focused on all of the ways the 2.5% increase may not be enough to meet your retirement needs, but when it comes to tax planning, even a small increase could negatively impact your tax liability.
For those whose incomes sit near a federal or state tax threshold, the important thing to note is that the COLA increase for 2025 could push your Social Security benefits higher in a way that also brings increased income tax liability.
So, even though 2.5% is a relatively small change compared to other COLAs of recent years, it could still greatly impact your tax bill — which is where important forward planning comes in…
How the COLA Increase Could Affect Your Taxes
The IRS considers Social Security benefits taxable as part of your ‘combined income’, which includes (1) your adjusted gross income (AGI), (2) any non-taxable interest, and (3) half of your Social Security benefits. The thresholds for taxing Social Security benefits are fixed, even as benefits rise due to the COLA.
In simple terms, here’s how that works:
- If you file your tax returns as an individual and your combined income is between $25,000 and $34,000, up to 50% of your Social Security benefits may be taxable.
- If your combined income is over $34,000, up to 85% of your benefits may be taxable.
- For married couples filing jointly, the taxable thresholds are $32,000 (for up to 50% taxability) and $44,000 (for up to 85% taxability).
This can mean that for those whose ‘combined incomes’ sit near those threshold figures ($25,000 single/$32,000 joint and $34,000 single/$44,000 joint), even the relatively small increase brought on by the 2.5% COLA increase could have significant tax consequences: it could push you into a higher tax bracket, with higher tax liability.
Tax Planning Strategies for the COLA Increase in 2025
To manage your tax liability in light of the COLA increase for 2025, you might want to consider the following strategies (again, especially if your 2024 ‘combined income’ is close to the tax thresholds we have mentioned):
- Consider Roth Conversions: If you have a traditional IRA or 401(k), converting some of these funds to a Roth account may help you manage taxes on your Social Security benefits. Withdrawals from Roth accounts aren’t counted as part of your AGI, which can help keep your combined income below the threshold.
- Tax-Efficient Withdrawals: If you’re supplementing Social Security with other sources of income, consider prioritizing withdrawals from tax-free accounts, such as Roth IRAs, over taxable accounts or tax-deferred accounts. This can reduce your AGI and keep more of your Social Security benefits free from taxation.
- Plan Charitable Contributions Strategically: For retirees who give to charity, using Qualified Charitable Distributions (QCDs) from an IRA can help lower your taxable income while supporting causes you care about. Since QCDs aren’t counted as taxable income, this approach can help keep your combined income below the taxation threshold for Social Security benefits.
Being proactive in tax planning for the COLA increase for 2025 can help you avoid unexpected tax burdens, maximizing the benefit of your Social Security adjustment.
Final Thoughts: Making the Most of the 2025 COLA Increase
Knowing the basic answer to “What is the COLA increase for 2025?” is just the first step. For retirees and those nearing retirement, we believe it is essential to plan strategically to make the most of the adjustment.
By focusing on tax planning, carefully considering ‘unretirement’ as necessary, and implementing risk-managed investment strategies, you can help to protect your income, increase your financial flexibility, and better navigate the effects of inflation.
The COLA increase for 2025 is designed to help Social Security benefits keep up with the rising cost of living, but the reality is that it is just one tool in your arsenal. The right approach to supplementing this tool, as well as trustworthy professional advice, could go a long way to meeting your retirement and other financial goals.
If this is a topic you need help with, either practically, or just to talk to someone about it, why not reach out to one of our fiduciary financial advisors? Any of our Retirement Income Certified Professionals (RICP®) would be more than happy to help you develop a retirement plan that meets your unique needs.
And if you enjoyed the comprehensive way we answered the question, “What is the COLA increase for 2025?” why not sign up for regular email updates from this blog, so you don’t miss future posts?
Iron Point Financial is here to empower you to secure a brighter tomorrow. We operate physical offices in Grove City, PA and Greenville, PA.
We primarily serve residents of Pennsylvania, Ohio, West Virginia and Florida but we also have registered broker licenses for 22 other states across the continental USA.
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Annuities Disclosures
The guarantee of the annuity is backed by the claims paying ability of the issuing insurance company.
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- Read the prospectus carefully before investing.
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NASDAQ & Index Disclosures
Investors cannot invest directly in indexes.
The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
The NASDAQ Composite Index is a market capitalization-weighted index of more than 2,500 stocks listed on the NASDAQ stock exchange.
The NASDAQ is a broad index that is heavily weighted toward the important technology sector.
The NASDAQ index is composed of both domestic and international companies.
Structured Notes Disclosures
Risk Considerations:
- Investing in Structured Notes involves a number of significant risks. Below, we have set forth certain risk factors and other investment considerations relating to the investment.
- For a complete assessment of the risks associated with a Structured Note investment, you should review the offering circular/ prospectus, term sheet and other related documentation for a particular trade, which fully describe all terms, conditions and risks.
- Not all investments are suitable for all investors. You should analyze Structured Notes based on your individual circumstances, taking into account such factors as investment objectives, tolerance for risk, and liquidity needs.
Buy-and-Hold-to-Maturity Instruments:
- Structured Notes are not designed to be short-term trading instruments, but rather investments that should be held until maturity.
Costs and Fees:
- There are certain costs and fees associated with investing in Structured Notes. You should consider these prior to investing.
- Details are contained in the offering materials for a particular investment.
Risk of Loss:
- Structured Notes do not guarantee any particular return of your investment.
- Structured Notes may decline in value in connection with a decline in the underlying asset value.
Liquidity Risk:
- As Structured Notes are intended to be held to maturity, there may be no or only a very limited secondary market, which means you may be unable to sell before the product reaches maturity.
- Even if a secondary market can be found, the limits of the secondary market, a lack of liquidity and/or the low trading volume in the market for Structured Notes would decrease the market value of Structured Notes. Thus, even if a secondary market exists, you may lose significant value if sold prior to maturity.
Credit and Default Risk:
- Structured Notes are unsecured debt obligations of the issuing company and thus subject to credit risk and default by the issuer.
- A decline in the creditworthiness of the issuer may affect its ability to meet its obligations, including the issuer’s ability to pay interest and repay principal.
- A default by an issuer could result in the loss of some or all of the amount you invest, even for Structured Notes denoted as “principal protected.”
- Therefore, the financial condition and creditworthiness of the issuer are important considerations.
Volatility Risk:
- The performance of Structured Notes may change unpredictably. This volatility may be influenced by the market and/or external factors, including financial, political, regulatory, economic events and other conditions.
Derivatives/Hedging Risk:
- The issuer may at any time establish, maintain, adjust or unwind hedge positions in respect of its obligations under the product, but it is not obligated to do so.
- Hedging activity may adversely affect the value of assets underlying the product and the performance of the product.
No Dividend or Interest Payment or Voting Rights, and Tax Consequences of Investing in Structured Notes:
- Holders of a Structured Note do not have voting rights.
- There are no dividends or interest payments paid during the term of a Structured Note.
- You may, however, have to pay income taxes on any imputed annual income even though no payment is received until maturity.
- Cetera does not provide tax advice.
- You should review the issuer’s offering material and consult with your own tax advisor.
No Government or Other Insurance Protection:
- Structured Notes are not bank deposits insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC), or by any other governmental agency or deposit protection fund.
Early Redemption:
- Structured Notes may be redeemed before the scheduled maturity date or as a result of a decision by the issuer.
- Certain events may result in an early redemption of Structured Notes.
- If Structured Notes are redeemed early following such an event, you may receive less than your original investment.
- The amount payable to you on an early redemption may also factor in the issuer’s costs of terminating hedging and funding arrangements associated with Structured Notes.
Market Disruption and Economic Factors:
- The trading market for Structured Notes might be volatile and might be disrupted or adversely affected by many events.
- There can be no assurance that events in the United States or elsewhere will not cause market volatility or that such volatility will not adversely affect the price of Structured Notes, or that economic and market conditions will not adversely affect the price of Structured Notes or that economic and market conditions will not have any other adverse effect.
- Market disruption can adversely affect the performance of Structured Notes.
- In addition to the level of the underlying on any day, the value of the Structured Investment will be affected by a number of economic and market factors, including the implied volatility of the underlier, the time to maturity, dividend rates, interest rates, issuer creditworthiness and macroeconomic factors, such as financial, political, regulatory or judicial events.
Before investing in a Structured Investment, investors should review the accompanying prospectus and prospectus supplement to understand the actual terms and risks associated with specific structured products. In certain transactions, investors may lose their entire investment.
Principal at Risk:
- Structured Products do not guarantee any return of your investment.
- Holders may lose 100% of their initial investment.
- A Structured Product may specify a level of protection at maturity, subject to the issuer’s credit risk.
- Notes that offer principal protection are only protected up to the specified protected amount.
- The above is not an exhaustive list of all the risks or other investment considerations relating to the product.
