Earlier today, when the Social Security Administration announced that the cost-of-living adjustment (COLA) for next year would be an increase of just 2.5%, or an average of about $48 extra per month, many retirees might have been disappointed, advisors say.

It was, after all, the smallest increase in three years and came at a time when Medicare Part B premiums, which are often deducted from Social Security checks, will increase by about $10 a month.

The reason for the lower bump in benefits was a drop in inflation, although advisors and senior citizen advocates note that post-Covid price increases still impact retirees.

“While cooling inflation might seem like a relief from rising costs, many folks, especially retirees, are still feeling the financial strain,” said Jared Chase of Signature Estate & Investment Advisors in Fort Lauderdale, Fla.

Essential expenses such as for healthcare, housing, food, utilities, and childcare remain elevated, he said, taking a toll on household budgets. For retirees who rely on interest income, the situation may seem even more dire. “The average one-year CD currently offers about 4.45%, down from nearly 5.5% a year ago,” he said. “With the Federal Reserve expected to lower rates over the next 18 months, income from these sources is likely to diminish even further.”

Chase and other advisors have a few pointers for helping financially stressed retirees plan for next year.

First, it’s important to remember that Social Security increases were exceptionally high over the past few years, advisors say, because of surging inflation. For 2024, payments increased 3.2%. Last year they jumped 8.7%. The year before that, 5.9%. But for 2021, Social Security payments edged up only 1.3%. A year earlier it was 1.6%.

Next year’s 2.5% adjustment was not unexpected and is actually not far off from long-term norms, according to data trackers. It reflects government inflation figures from last month, when the Consumer Price Index (CPI) was up 2.5% over the preceding 12 months. The Bureau of Labor Statistics released new data data today putting inflation at 2.4%.

“This is the lowest since March of 2021,” said Lisa Featherngill at Comerica Wealth Management in Winston-Salem, N.C. “The [high] Social Security COLA increases from 2022 through 2024 reflected the inflation rates at that time.”

Still, clients who are concerned can start by reviewing how they’ve spent money over the past several months, she said. They should ask themselves if there are unnecessary, discretionary expenses that can be cut. Some might consider boosting income with part-time work.

After that, she recommended that advisors review retirees’ investment portfolios. It’s possible that investments could be reallocated to create more income, she said. “Be careful not to get too focused on income, because you could give up future growth that is needed to sustain your [client’s] lifestyle,” she added.

It also might be a good opportunity to consider rebalancing the portfolio, she said. After all, in the first three quarters of this year, the S&P 500 returned a record-breaking 20.8% while the S&P aggregate bond index returned roughly 3.4%. It might make sense to “recognize some of the gains that are currently on paper [and] reinvest in asset classes that haven’t grown as quickly, like bonds, potentially positioning [clients] for future growth,” she said.

Rebalancing could include creating more opportunities for cash generation, but only for “short-term needs,” said Shashin Shah, a manager director at SFMG Wealth Advisors in Plano, Texas. “Retirees should look at shortfalls and budget cash for the next 24 months to 36 months, to be safe and secure in their planning.”

Many retirees, he said, establish a monthly budget initially and neglect to update it as needs, risk-tolerance levels, and the economic environment change. “Given the unprecedented increase in inflation over the last few years, this is the perfect time to reestablish budgets,” he said.

Be careful, though, when considering taking withdrawals from an investment portfolio to make up for budget shortfalls, experts caution. Equities may be way up, but that doesn’t give clients license to treat their stock portfolios like an ATM, they say.

“It is extremely important to strike a balance between meeting your spending needs, keeping up with or outpacing inflation, and preserving your nest egg for the long term,” said David Plante at Fort Pitt Capital Group in Harrisburg, Pa. It’s better, he said, to “adjust spending and optimize resources where necessary, rather than relying too heavily on investment gains.”

If taking money out of stocks, be aware of the tax consequences and implications for the client’s overall portfolio construction, advisors say.

The same goes for bonds.

“While bond values may have dipped, selling them to cover shortfalls might not be the best move either,” Plante said. “Bonds are designed to provide portfolio stability, and selling during a downturn locks in potential losses.”

Advisors note that bond values and bond yields, which move in opposite directions, are affected by changes in interest rates. “Yields are higher today than they were a few years ago, so you may be able to obtain a higher yield” today compared to a few years ago, said Dan Sudit at Crewe Advisors in Salt Lake City. “Likewise, if you are holding bonds to maturity, then the decline in values is irrelevant so long as you are buying investment-grade bonds with the expectation of holding them to maturity.”

In other words, a bond with a face value of $10,000 may currently be worth only $9,500, but if you wait till maturity it will still pay out $10,000. “The current value is a paper loss that has no impact on long-term strategy,” he said.

Clearly, any adjustments clients make in light of fluctuations in Social Security COLAs should be done carefully and strategically, advisors say, with an eye toward the repercussions and long-term impact. The worst thing to do, they say, is panic. “Don't ignore short-term changes, but also don't immediately react to them,” said Sudit. “Don't make massive shifts or changes [because of] blips in the system.”

And if inflation rises again, and COLAs increase in future years, it should be considered a “bonus,” said Jonathan Thomas at LVW Advisors in Pittsford, N.Y. No one can control Social Security rates, he said, and financial plans shouldn’t hinge on COLA growth.