2024 Getty Images/Getty Images News via Getty Images
The 2026 COLA interest rate was announced in October 2025 to be 2.8%.
The Fed predicts that if CPI is slightly higher than PCE, COLA may be in the range of 2.3% to 2.6% in 2027.
Retirees who rely on interest income from term deposits and savings accounts have seen their incomes fall following recent interest rate cuts.
If you’re thinking about retirement or know someone who is, three simple questions are making many Americans realize they can retire earlier than expected. Take 5 minutes to learn more here
In mid-December, the Federal Reserve cut interest rates by 25 percentage points, lowering the benchmark federal funds rate to a range of 3.5%-3.75%.
The move continues to fuel optimism among market participants, as the valuation of most risky assets is directly tied to the risk-free rate, at least when modeling companies’ discounted future cash flows. Bond yields have also fallen significantly in recent months (lower yields mean higher prices), so investors have profited across the board.
But the problem is, unfortunately, millions of Americans are not participating in this market. For those in retirement, Social Security benefits are a critical lifeline to make ends meet.
Therefore, the Social Security Administration’s (SSA) Cost of Living Adjustment (COLA) is a big deal for millions of people every October. There’s a good reason for this, as this COLA will determine how much a given senior’s monthly check will increase in the coming year.
Most seniors probably already realize that this cost-of-living adjustment is tied to inflation, but let’s dig a little deeper to see if this cut has anything to do with next year’s COLA (2027).
As many investors may know, the annual cost of living adjustment (COLA) proposed by the Social Security Administration is intended to help seniors cope with rising prices across the economy. There are many factors that measure this increase, but the Consumer Price Index (CPI) is a key factor in how SSA determines cost of living increases in the coming year.
The link between the Cost of Living Adjustment (COLA) and the Federal Reserve’s recent interest rate cuts from 2025 revolves around inflation management and economic stability.
In short, lower interest rates may indicate a stabilizing economy, although recent data has shown inflation to be somewhat stubborn. Given that COLA adjustments are typically tied to the inflation rate, investors can look to long-term bond yields to assess what inflation might look like in the next year or two.
On this basis, looking at the one-year Treasury note (which currently yields about 3.63% as of this writing), inflation expectations continue to slow, but not as much as they did earlier in the cycle (as of July 2025, they were trading at about 4.2%). The one-year Treasury yield affects how interest rates change over time and reflects the average level of the federal funds rate over a year. As a result, the two-year Treasury note may be a better indicator of future inflation and interest rates – this particular bond currently yields about 3.54%.
Of course, there are many factors that affect bond yields besides inflation expectations. Overall GDP growth forecasts and demand for government bonds are other key factors driving short-term moves in these securities. But for retirees, inflation expectations have indeed improved compared to previous forecasts, with the Fed’s latest dot plot predicting PCE inflation of 2.9% in 2025 (higher than previously expected), 2.4% in 2026 and 2.1% in 2027. This has translated into a 2026 COLA of 2.8% announced in October 2025, slightly higher than the 2.5% 2025 COLA but still reflecting a cooling off from the peak years of inflation. Looking forward, these forecasts suggest that if CPI is slightly higher than PCE, potential COLA growth in 2027 will be in the 2.3-2.6% range, but the actual number will depend on the third quarter of 2026 data.
The Federal Reserve cuts interest rates to stimulate the economy, which can benefit individuals financially. The value of stocks and bonds typically rises in response to interest rate cuts, although the impact may already be reflected in current market prices. Homebuyers with an adjustable-rate mortgage have lower monthly payments, while those with a fixed-rate loan may be able to refinance their savings. Lower interest rates can also lower the cost of a reverse mortgage, allowing for more equity in your home when it’s time to sell. Additionally, interest rates on credit card and consumer debt are likely to see minimal declines as the market has already priced in most of the expected declines. It is also important to consider the benefits to the government of lowering interest rates, namely slowing the growth of interest payments on the national debt.
Millions of retirees who rely on interest income from certificates of deposit, savings accounts or money market funds could experience a drop in income following a rate cut. Likewise, as yields fall, the value of a bond investment may increase. Since many retirees often choose long-term investment portfolios that are more skewed toward bonds, this is a good thing.
For Social Security benefits, on the other hand, lower inflation expectations could mean lower annual increases. However, the age-old advice of investing your monthly surplus in stocks and bonds still holds plenty of credibility in this day and age. The most recent CPI data shows a year-over-year increase of 3.0% through September 2025 (the latest full report, as the October release was canceled due to the government shutdown and the November release is scheduled for December 18), retirees should pay attention to upcoming data releases such as December CPI (November) for subsequent months in 2026 for further clues on cola trends in 2027.
I think the market is currently pricing in a modest rise in inflation expectations given a resilient economy, with the Fed indicating just one more rate cut in 2026 and inflation expected to gradually slow to 2.4% by the end of 2026. While a sharp pickup in inflation is not the base case for most economists, continued pressure in areas such as housing and services could keep COLA in the 2-3% range. As a result, seniors may be forced to find other sources of income outside of Social Security to combat continued increases in health care and necessities prices. Going into 2026, monitoring Fed actions and inflation data will be key to forecasting COLA in 2027 and adjusting retirement strategies accordingly.
Most Americans vastly underestimate how far they will need to retire and overestimate how ready they are. But data shows that people who have a habit will have more than double Savings for those who don’t.
No, it has nothing to do with increasing your income, saving, cutting coupons, or even reducing your lifestyle. It’s simpler (and more powerful) than any of them. Frankly, it’s shocking that more and more people aren’t adopting this habit, considering how easy it is.
