The problem? These COLA payments often fall flat. And preliminary analysis suggests that next year could see another year of low COLA payments for retirees.
With rates of inflation and the main areas of retiree spending still running high, retired investors need to do something to keep their portfolios and income growing. Luckily, there are a few techniques and funds to help on that front.
A Big COLA Surge & Then Flatline
To fight that rise in inflation, Social Security has a mechanism to help increase payments tied to measures of inflationary changes. The program uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to figure out its COLA payments. That’s calculated a little differently than the bread-and-butter CPI we’re all used to. However, with inflation surging, Social Security recipients received a near-record 8.7% increase to benefits for 2023.
The problem is next year’s increase isn’t going to be very good. According to preliminary estimates by The Senior Citizens League (TSCL), 2024’s COLA should only be about 3.1%. That lower figure is because inflation has moderated since last summer.
However, the devil is in the details. As we’ve said, CPI-W is sort of a flawed way to calculate seniors’ expenses and inflation. All measures of the CPI track a basket of goods divided into the following categories: Food, Apparel, Transportation (including energy), Medical, Recreation, Education, and Other Goods. The issue is that CPI-W is actually weighted to look at the spending habits of young working adults—people in their 20s to 40s—so it overweights items such as personal services, gasoline, and electronics. It then underweights things like medical costs and breakfast cereal.
For seniors, this ends up being a raw deal and significantly produces a skewed COLA that doesn’t actually represent the goods they spend their money on. CPI-W-driven COLAs have averaged 3.4% annually since 2000. Actual cost of goods and services that seniors spend their money on have averaged about 6.2%.
How to Fight Back Inflationary Presure?
Equity Funds to Boost Your Portfolio’s Cost of Living Adjustment
| Name | Ticker | Type | Actively Managed? | AUM | YTD Ret (%) | Expense |
| iShares Global Infrastructure ETF | IGF | ETF | No | $3.53 billion | 4.2% | 0.43% |
| T. Rowe Price Dividend Growth ETF | TDVG | ETF | Yes | $135 million | 3.3% | 0.5% |
| iShares Core Dividend Growth ETF | DGRO | ETF | No | $23.3 billion | 0.8% | 0.08% |
| Vanguard Real Estate ETF | VNQ | ETF | No | $78.4 billion | -1.4% | 0.12% |
| Fidelity® Select Natural Resources | FNARX | Mutual Fund | Yes | $890 million | -3.8% | 0.82% |
| iShares North American Natural Resources ETF | IGE | ETF | No | $715 million | -6.5% | 0.43% |
Bond Funds to Boost Your Portfolio’s Cost of Living Adjustment
| Name | Ticker | Type | Actively Managed? | AUM | YTD Ret (%) | Expense |
| JPMorgan Inflation Managed Bond ETF | JCPI | ETF | Yes | $975 million | 2.9% | 0.25% |
| iShares 0-5 Year TIPS Bond ETF | STIP | ETF | No | $12.5 billion | 2.1% | 0.03% |
| Vanguard Short-Term Inflation-Protected Securities Index Fund | VTAPX | Mutual Fund | No | $61.6 Billion | 2% | 0.06% |
| Eaton Vance Short Duration Inflation-Protected Income Fund | EARRX | Mutual Fund | Yes | $970 million | 1.9% | 0.84% |
| PIMCO Real Return | PRTNX | Mutual Fund | Yes | $11.1 billion | 1.6% | 0.87% |
Another choice? Own the producers of raw materials themselves. When prices are high for corn, coal, and crude oil, the ones who grow or pull the stuff out of the ground profit more. And in that, we get an expansion of multiples during high price environments. Buying a fund like the iShares North American Natural Resources ETF or Fidelity Select Natural Resources makes adding commodity producers a snap.
Third, betting on real assets has proven to be a good inflation fighter. Real estate and infrastructure assets like pipelines or toll-roads often come with rent/usage fees that rise in high inflationary environments. Cash flows from these assets often come to investors as high dividends. So, as inflation grows, so do the cash flows. The one-two punch of the Vanguard Real Estate ETF and iShares Global Infrastructure ETF could be all you need.
Finally, on the bond side of the equation, having plenty of exposure to short-dated TIPs and I-bonds can work wonders. Both bonds are very different in exposure, but provide inflation protection as rates rise. A fund like iShares 0-5 Year TIPS Bond ETF can protect your purchasing power and overcome inflation.
