A cost-of-living adjustment (COLA) periodically raises benefit amounts to help offset inflation. Social Security applies a COLA most years based on a government inflation measure, which helps that income hold more of its purchasing power over time.
Not all retirement income includes a COLA. Many fixed annuity payments, for example, stay level unless an inflation feature is added, so coordinating which dollars rise with inflation is part of income planning.
Example
When a COLA is announced, a retiree's monthly Social Security payment rises, while their level fixed-annuity payment stays the same.
This definition is for general educational purposes only and is not financial, tax, or legal advice. Tim Hartle is an independent insurance professional. Annuity guarantees are subject to the claims-paying ability of the issuing insurance company and are not FDIC insured. Rules and product features vary by situation and by state. Please consult a qualified advisor about your own circumstances.