The Social Security Administration's recent announcement of a 2.5% Cost of Living Adjustment (COLA) increase for 2025 may come as welcome news for retirees.¹ This increase, though more modest than 2024’s 3.2% increase or 2022’s 8.7% boost, is designed to help payments keep pace with inflation’s higher prices. 

The COLA bump-up is designed to make it easier for recipients to pay for typical expenses when inflation is rising. In fact, new Empower research indicates that 70% of people pushing back retirement are doing so due to high living costs. COLA increases are designed to offset the sting of inflation. 

This year’s increase may not be enough to offset rising costs on its own, however. Finding sensible places to cut back, and making money-savvy moves with savings, can help bridge the gap. 

Adding COLA to the mix

The 2.5% COLA increase roughly equates into an extra $49 a month for the average retiree.² Although these extra funds can help offset costs in retirement, the latest COLA increase does not fully keep pace with inflation, which finished 2024 at 2.7%.³

What’s a retiree to do? The good news is there are several options to help bridge the gap. Whether that means sleuthing for higher-interest savings accounts or changing 401(k) distributions, retirees should consider two main objectives: make the increase count, and find ways to help maximize fixed income. 

Develop a savings strategy

Optimizing savings is one of the most effective ways to stretch a COLA increase. Even a modest boost in savings can have a big impact over time, particularly for those who are already living on a fixed budget.

It’s helpful for retirees to begin by reviewing their savings accounts. A thorough review offers accurate figures and — just as importantly — confirms their interest rates. 

Only 42% of Americans report switching banks, even though doing so might help savers find higher interest rates elsewhere.⁴ Many retirees still have money held in low-interest savings accounts, even if there are other high-yield cash accounts available. These are some of the most common options:

• Money market accounts have an interest rate that floats with interest rates
• Certificates of Deposit (CDs) typically offer higher interest to lock cash in for a certain amount of time
• High-yield savings accounts may help amplify one’s interest earning potential 

Additionally, consider automating savings contributions where possible.⁵ Even if it’s a small amount, regularly putting aside a little money each month can add up over time and help create a buffer for unexpected expenses. And by making savings automatic contributions, retirees can avoid the temptation to spend. 

Focus on budget flexibility

Discretionary spending is often where retirees (and savers of all ages) can make the most impact. This may mean cutting back on dining out, avoiding impulse purchases, or limiting expensive hobbies — all of which can free up extra money to redirect into savings or bills. 

Begin by evaluating fixed expenses (e.g., housing, utilities, and insurance) to see if there’s any wiggle room. For example, some retirees opt to downsize their homes, potentially turning their home equity into liquid assets. There are tax considerations relating to real estate capital gains, so consider speaking with financial and tax professionals before making such a big decision.

Those who can’t or choose not to move may want to explore energy-saving opportunities within their home. Reducing utility costs through energy-saving upgrades, such as LED bulbs, programmable thermostats, or improved insulation, can make a big difference. Some programs even offer low-cost or free home energy audits, which can detect efficiency opportunities in a home that could help lower bills.⁶

Reining in doesn’t have to mean eliminating fun: it means being intentional with one's money.

Read more: Home sweet home: A majority of Americans want to age in place

Draw from accounts in order

The order of withdrawal from retirement accounts can be crucial. Drawing from taxable accounts first, followed by tax-deferred accounts (such as 401(k)s and traditional IRAs), and post-tax accounts (Roth IRAs) can enable some accounts to potentially grow tax free, while also helping to minimize taxes on withdrawals later from other accounts.7

Both 401(k)s and traditional IRAs are funded with pre-tax dollars, meaning any investment growth is tax-deferred during one’s earning years. Withdrawals are subject to income taxes and can be subject to penalties if withdrawn before retirement. A Roth IRA, on the other hand, is funded with money that has already been taxed, meaning there are no taxes on retirement withdrawals of any investment gains. The principal can be withdrawn at any time before or after retirement without penalty. Withdrawing from tax-eligible accounts first can potentially lower income taxes later in retirement.

Use RMDs wisely

RMDs don’t kick in immediately upon retirement. Generally, they begin on April 1 of the year after the account holder turns 73.⁸ For example, retirees who turn 73 in June would need to take their first RMD in April of the following year.

RMDs are often used as a first source of retirement investment income, since account holders are legally required to take them. People are free to withdraw more than the RMD, but no less. Setting monthly or quarterly distributions can help create a consistent income stream that can be paired with other sources of retirement income.

Delay Social Security, if possible

Retirees who can hold off on claiming Social Security may benefit from doing so. The Social Security Administration will increase a person's payment for every month they wait to claim benefits before turning 70.⁹ This benefit can increase by 8% a year for those who wait the full amount of time.¹⁰

It’s critical to factor in one’s own health and financial situation before deciding to delay. Those with shorter life expectancies or pressing financial needs may consider withdrawing upon eligibility rather than holding off.

Tap into discounts and benefits

The variety and volume of discounts available to retirees can be a financial game-changer. Whether that’s grocery discounts or free museum admissions, retirees are often entitled to savings that can add up quickly.

Memberships to senior organizations may provide access to discounts on everything from travel and dining to health insurance. State and local governments often offer tax relief, healthcare subsidies, and other financial assistance programs aimed at retirees.¹¹ 

Plan for the long-term: Consider future COLA adjustments

The latest COLA increase should be one part of a broader, long-term financial strategy. By optimizing savings, trimming expenses, exploring supplemental income options, and tapping into available discounts, retirees can help maximize their income and stretch their dollars further — even in the face of inflation.

The key for prospective retirees is to take proactive steps now for financial security in the future. With the right strategies in place, retirees can ensure that their fixed income goes as far as possible, helping to provide peace of mind and financial stability for the long-term.