How Retirees Can Hedge Against the Shrinking Real Value of Social Security Benefits

The 2.8% Cost-of-Living Adjustment (COLA) for 2026, while a modest increase, falls far short of keeping pace with the soaring healthcare costs facing retirees. With medical expenses projected to rise by 8.5% in the group market and 7.5% in the individual market, and the average 65-year-old retiring in 2025 expected to spend $172,500 on healthcare over their lifetime, the erosion of Social Security's purchasing power is a pressing concern. Retirees must adopt strategic, diversified income approaches to offset these challenges. Below, we explore actionable strategies beyond traditional savings accounts and annuities.

1. Leverage Inflation-Protected Investments

Treasury Inflation-Protected Securities (TIPS) and dividend-growing equities offer retirees a way to preserve purchasing power. TIPS adjust principal values in line with inflation, ensuring returns outpace the 2.8% COLA. Dividend stocks, particularly those in sectors like healthcare or utilities, often provide rising payouts that counterbalance medical cost surges. For example, companies with strong earnings growth can increase dividends annually, creating a buffer against rising premiums and out-of-pocket expenses.

2. Optimize Part-Time Work and Passive Income Streams

Part-time employment can supplement income while delaying Social Security claims, which increases future benefits by up to 24% if delayed until age 70. However, retirees must navigate the Income-Related Monthly Adjustment Amount (IRMAA), which ties Medicare premiums to modified adjusted gross income (MAGI). In 2025, single filers earning above $103,000 face higher premiums. To mitigate this, retirees can pair part-time work with passive income sources like real estate rentals or peer-to-peer lending, which offer flexibility without triggering IRMAA thresholds.

3. Diversify with Bonds and Structured Products

Fixed annuities and high-yield bonds provide stable, predictable income. Fixed annuities, in particular, can be structured to cover healthcare expenses, by creating a "healthcare bucket" with guaranteed payments. Bonds and bond funds, offering yields between 4% and 5%, further diversify risk while generating steady returns. For retirees seeking innovation, litigation financing-a niche strategy where investors back legal claims for a share of settlements, offers uncorrelated returns with potential for high payouts when cases succeed.

4. Tap into Housing Equity and Digital Assets

Reverse mortgages and real estate investment trusts (REITs) allow retirees to access liquidity without selling homes or properties. REITs, which provide exposure to real estate, without active management, often yield 3–5% annually. Additionally, digital products like e-books or online courses generate passive income with minimal ongoing effort, offering a scalable solution for covering healthcare costs.

5. Implement Tax-Optimized Withdrawal Strategies

Smart tax planning, such as Roth conversions and strategic withdrawal order, can reduce tax burdens and preserve capital. By converting traditional IRA assets to Roth accounts, retirees can access tax-free growth for future healthcare expenses. Prioritizing low-tax-impact accounts (e.g., HSAs) for medical costs also shields Social Security benefits from taxation.

Conclusion

The combination of inflation-protected investments, diversified income streams, and tax-efficient strategies is critical for retirees navigating the dual challenges of a low COLA and rising healthcare costs. While no single approach is foolproof, a layered strategy-incorporating TIPS, part-time work, annuities, and passive income-can create a resilient financial foundation. As medical expenses continue to outpace general inflation, proactive planning and adaptability will remain retirees' best defenses.