Factor 4: Cost-of-Living Adjustments (COLAs)

Inflation silently erodes the purchasing power of fixed-income retirees. To combat this, Social Security features an automatic Cost-of-Living Adjustment designed to help your checks keep pace with rising prices. The government calculates the COLA based on the Consumer Price Index for Urban Wage Earners and Clerical Workers during the third quarter of the year. If inflation rises, your benefit rises the following January; if inflation remains flat, your benefit remains unchanged. Your benefit never decreases due to negative inflation.

What makes the COLA particularly powerful is its compounding nature. When you delay your claim to age 70 to earn a higher base benefit, all future COLAs are applied to that larger dollar amount. A 3 percent COLA on a $2,480 check yields a larger nominal increase than a 3 percent COLA on a $1,400 check. Over a 25-year retirement, this compounding effect dramatically widens the gap between early claimers and late claimers.

You must also factor in your healthcare costs. Most retirees have their Medicare Part B premiums automatically deducted from their Social Security checks. Because healthcare costs frequently rise faster than general inflation, an increase in your Medicare premium can consume a significant portion of your annual COLA, resulting in a net check that feels relatively flat. You can learn more about standard premium rates at Medicare.gov.