Retirement Answers

The Social Security Administration just announced the 2026 cost of living adjustment for your Social Security benefits, and it's a fairly decent adjustment. So in this podcast episode, I want to tell you about the twenty twenty '6 COLA, what it is, who it applies to and why when you claim your benefits matter so much when it comes to your COLAs throughout retirement. But before we jump into that, my name is Jacob Duke. I'm your host here and I'm a certified financial planner and the owner of a retirement planning firm where we help people just like you plan smarter and retire better. Now, if we look back over the last few colos that we've gotten since 2023, we know that in 2023, was 8.7%, which is pretty high.

Obviously, we're coming out of a high inflationary period of time whenever that one happened. In 2024, it was 3.2%. In 2025, it was 2.5%. And here in 2026, as we go into the new year, your COLA will be 2.8%. This was just announced here last week by the Social Security Administration.

So it's not as high as it was back in 2023, but obviously that means inflation is also not as high, at least on paper, as it was back then either. Now, I explain how the COLA is actually applied to your benefits, because it's not as simple as you might think, Let's first talk about who the COLA actually applies to. The first thing you have to know is that you do not have to be receiving your own benefits to get the annual cost of living adjustment. You can still be delaying your benefits and have the COLA applied, but you do have to be at least 62 years old. And from what I understand about this, as I've read through how this really works, is that the first COLA kicks in in January in the year following the year in which you turn 62.

So there's not really a proration for the partial year in which you'd be, you know, partly 62 for part of that year. So for example, if you turn 62 here in 2025, let's say in June, you did not receive a 2025 COLA, nor was it prorated the six months or so that you would have been 62 here in 2025. But you will receive the 2026 COLA, and that will be your first one come January. So everyone who's 62 or older, they get the COLA whether you're receiving your benefits or not. But what's interesting is that this still leaves a problem for people that are 60 to 62.

Why? Well, because your wages throughout your life, those are going to be indexed for inflation and effectively they adjust to equivalent dollars up until the year you turn 60. So that's whenever the indexing for inflation stops. Now, this inflation adjustment, it's important because your adjusted wages are used to calculate your Social Security benefits. You wouldn't want your salary that you earned in 1970 to be used to calculate your benefits without first being adjusted to today's dollars, because then obviously your Social Security benefits would be a lot lower than they really otherwise should be.

So whether you're still working or you're already retired, after you reach 60, any sort of inflation adjustments on your wages, they stop the year after you turn 60. Now, why is this a big deal? Well, because your COLAs for Social Security, they don't start until you're 62, and this creates the infamous donut hole. A two year period of time when your previous wages are no longer being adjusted to today's dollars, and when you're not yet old enough to get the COLAs for your Social Security benefits themselves. And this can be frustrating when you think about it, right?

It's two years in which neither your benefits nor your earnings are actually being adjusted for inflation and brought up to today's dollars. But it's something that every retiree ends up facing and there's really nothing that you can do to avoid it. It happens to all of us, but what could add insult to injury is when there is a really high inflation period of time during those two years, whenever you're 61 and turning 62. In that scenario, the dollar is becoming less valuable, but neither your wages nor your benefits are being adjusted accordingly during that donut hole period of time. So all you can do is hope and pray that low inflation years happen during that period of time.

Now, if we think back to the 2026 colon, the fact that it's gonna be 2.8%, you might automatically assume that your benefits will increase by that 2.8% amount, but that's not exactly true. It's more accurate to say that your benefits will increase by about 2.8% in 2026. And the reason for this distinction is because of how the COLA is actually applied to your benefits. The Social Security Administration doesn't just take the benefit that you're already receiving and then add 2.8% to it. What they actually do is they add that 2.8% to your PIA or your primary insurance amount.

And if you don't know what that PIA is, it's simply the benefit that you're entitled to at your full retirement age. This is what we call your quote full benefit based on your earnings record. So the COLA is actually applied to your PIA, and then your benefits are determined each year based on when you start taking them. And if you're not yet taking your benefits, your PIA, that's still being increased by the COLA every single year as well. So if you took your benefits early before full retirement age, your effective COLA, it could end up being slightly less than 2.8%.

And if you took your benefits after your full retirement age, your effective COLA will be slightly higher than 2.8%. Again, this is because the COLA is first applied to your PIA, and then a certain factor is used and applied to your PIA to determine what your monthly benefits are based on the age in which you originally claimed Social Security. And it's important to understand how this works because it could impact your decision around when you take your benefits in the first place. In effect, delaying your benefits allows your future COLAs to be more effective in dollar terms because the percentage rate increase being applied is in essence being applied to a larger dollar amount rather than a reduced dollar amount if you had taken your benefits before your full retirement age. So beyond the fact that your benefits will be reduced if you take your benefits early, if you take your benefits at 62, it'll be about a 30% reduction off of your full retirement age or your PIA.

Your future COLOs will also be less effective as well because of that reduction in your benefits and the fact that it has to be applied to your PIA to reach and calculate your benefits. So that's your 2026 cost of living adjustment for Social Security. It is 2.8%, and those are a few other little tidbits or knowledge points for you to know as you understand how this COLA works, how it's applied, how it's calculated, and how it might impact your benefits and also maybe your claiming decisions when it comes to Social Security. Thanks so much for tuning into this week's episode of Retirement Answers. I look forward to talking with you again very soon.

Hey, it's Jacob again, and I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode. I look forward to talking with you again next week.