In the fall, the Social Security Administration announced its annual cost-of-living (COLA) adjustment. Around 71 million Americans will receive a 2.8% increase in their Social Security Income benefit for 2026. While the 2026 increase is less consequential than the previous year, discussing how to plan for an increased cash flow is still a good exercise.
What is a COLA Adjustment and How is it Calculated?
COLA stands for cost-of-living adjustment. The cost-of-living adjustment (COLA) aims to ensure that the purchasing power of Social Security benefits and SSI payments are not eroded by inflation. Each year the Social Security Income (SSI) cost of living adjustment is determined by the Consumer Price Index (CPI) based on the third quarter of the previous calendar year. So, your 2026 cost of living benefit increase is based on inflation from July 2025 through September 2025.
Maximize Your COLA Increase
Of course, this begs the question, “how big of a deal is this for me?” Unfortunately, the answer to this question will be specific to whoever is asking it. While this is neither clear cut nor particularly helpful in of itself, this potential free cash flow may present an opportunity to maximize your benefit.
If you find yourself in this situation, here are some options you may consider:
Invest It
This is the most prudent option if the situation is right. If you’re living off your social security and other income sources (pensions, rental income, etc.) and do not need portfolio withdrawals, why not add a bit to your investments?
Build Cash Savings
An alternative for those (like in the scenario above) not regularly drawing from their investment portfolios to cover cash flow needs. While this might not add any growth potential to your investment portfolio, having money stashed in your bank account for your next unexpected expense, purchase, or other cash need can be beneficial.
Reduce Portfolio Withdrawals
This is another option for many retirees. Most retirees take distributions from their investment portfolios to support their lifestyles in retirement to some extent. Reducing the amount you withdraw each month or skipping a withdrawal here and there may keep more assets in your retirement accounts longer. The longer those assets stay invested, the more opportunity they have for growth.
Treat Yourself
Yes, you read that correctly. While certainly the least productive of the options from a cash flow planning standpoint, only some dollars have to be utilized to maximize savings or investment growth. Going about this is similar to how you would build cash savings, as discussed above. The only difference is that instead of saving up for a possible future cash flow need, you spend it on yourself! It can be on anything– a day at the spa, a seat upgrade on your vacation flight, or some new golf clubs. Sometimes it is good to treat yourself!
Social Security Tax Changes May Impact You
The income and tax ramifications from the Social Security Income cost of living adjustment could affect you. There are several changes to the federal tax on social security and how you’ll pay taxes on your social security. One change to affect taxes is new earnings limits regarding Social Security taxes and Social Security reductions.
- The maximum amount of earnings subject to Social Security tax has increased to $184,500 for 2026.
- For those currently collecting Social Security benefits and younger than their full retirement age, the earnings limit has been increased to $24,480. For every $2 earned over $24,480, your Social Security benefit will be reduced by $1.
- For those currently collecting Social Security benefits and are reaching their full retirement age in 2026, the earnings limit has increased to $65,160. For every $3 earned over $65,160, your Social Security benefit will be reduced by $1.
Unfortunately, not all income limits are being increased. The limits used to determine how much of your social security benefit is taxable have stayed the same. For lower-income individuals, the Social Security cost of living increase could cause more of their benefits to be taxable than in previous years. Use the following formula to calculate how much of your Social Security is taxable: take one-half of Social Security income received during the year and add it to other income (wages, pensions, interest, dividends, and capital gains). The resulting number determines the taxability of benefits using the following brackets:
- Not Taxable (0%)
- Under $25,000 for Single, Head of Household, Qualified Widow(er), and Married Filing Separate tax filers.
- Under $32,000 for Married Filing Joint tax filers.
- 50% Taxable
- Between $25,000 and $34,000 for Single, Head of Household, Qualified Widow(er), and Married Filing Separate tax filers.
- Between $32,000 to $44,000 for Married Filing Joint tax filers.
- 85% Taxable
- Over $34,000 for Single, Head of Household, Qualified Widow(er), and Married Filing Separate tax filers.
- Over $44,000 for Married Filing Joint tax filers.
Another negative of this is that unlike income tax brackets, where only the income above the bracket limit gets taxed at a higher rate, with Social Security, once you breach the income limit, the entire amount is taxed at the higher rate.
Talk to a Tax Planning Professional
This article covers some of the major items that the 2026 Social Security cost of living adjustment could affect regarding your income, taxes, and cash flow planning. But as mentioned earlier, the effects of this change are specific to each individual and their situation. For a comprehensive analysis on Social Security, discuss your situation with a CERTIFIED FINANCIAL PLANNER® practitioner or tax professional.
Allegheny Financial Group is a Registered Investment Advisor. The information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. The information included herein was obtained from sources which we believe reliable. The views in this article are being provided for informational purposes only. It does not represent any specific investment or tax advice and is not intended to be an offer of sale of any kind. Past performance is not a guarantee of future results.
Allegheny Financial Group | February 2024
Sources:
https://www.ssa.gov/news/en/press/releases/2025-10-24.html
https://www.ssa.gov/news/en/cola/factsheets/2026.html
Taxes on Social Security: Five Things You Need To Know | Kiplinger
https://www.bankrate.com/retirement/social-security-benefits-changes-in-2023/
