The news is out: Social Security’s cost-of-living adjustment (COLA) for 2025 has been revealed. Starting in January, current recipients will see a 2.5% increase in their benefits, reflecting the inflation rate from 2024.

Still, this increase doesn’t seem sufficient. Despite being a straightforward calculation, many people—especially retirees—are finding it tougher than ever to manage increasing expenses. Small added costs can accumulate significantly.

With this in mind, while I’m not yet retired, I can see it coming. Here’s my action plan based on current insights. Feel free to adopt my strategies to stay ahead of inflation during retirement.

Investing in reliable dividend growth

As a general rule, the older you get, the less exposure you should have to the stock market. When seeking stability and security, it’s wise to favor safer investments like bonds or higher-yield cash. This is perfectly reasonable.

However, I’ve concluded that with interest rates being at least somewhat higher now, the benefit of holding more fixed-income assets and fewer equities no longer justifies the trade-off. I’m not going off the deep end—I still want and need steady investment income, along with some growth (or price appreciation) from stocks that provide increasing dividends.

The best way to achieve this is through companies like The Coca-Cola Company (NYSE: KO) and Procter & Gamble (NYSE: PG). While their dividend yields may not be the highest, standing at 3% and 2.2% respectively, their dividend growth rates outstrip typical long-term inflation. Both have consistently raised their dividends for many years and show respectable long-term price appreciation.

One investment I’m steering clear of now? Treasury Inflation-Protected Securities, or TIPS. Although these government bonds work as intended by adjusting interest payments with inflation, they never actually surpass inflation. Eventually, you’ll want a strategy that provides a bit more leverage.

Reducing my portfolio’s overall risk

Considering my intention to include more dividend-paying stocks in my retirement plan than I previously considered, I will likely hold many fewer growth stocks or possibly none at all. This doesn’t mean I’m completely abandoning capital appreciation; I’ll still achieve that through dividend-paying stocks.

This approach may not win everyone over nowadays. Shying away from popular stocks like Nvidia (NASDAQ: NVDA) or Amazon (NASDAQ: AMZN) may seem like leaving easy profits unclaimed. However, these stocks, while impressive performers since the market hit lows due to the pandemic in early 2020, represent an exception rather than a consistent trend.

Thus, don’t expect them or any other growth stocks to replicate their previous successes. We might be entering a period where value stocks could perform at least as well—if not better—than growth stocks. This presents a potential risk for retirees, as nobody wants to be forced to liquidate growth stocks at a low point just because immediate cash flow is needed that dividends could otherwise provide.

Creating a realistic budget and eliminating unnecessary spending

Managing my investments to lessen overall risk while maximizing my income—both now and in the future—is just part of my plan. It’s equally important to track where my money goes, both in terms of expenditures and revenues. That’s why I’m going to draft a thorough budget based on my actual monthly expenses.

Following that, I’ll aim to eliminate any unnecessary spending. Like many other consumers/investors, I don’t expect to find glaringly wasteful expenses (I’m certainly not making regular trips to the French Riviera). However, that’s not how many retirees fall into financial difficulty.

Often, the hardships stem from a multitude of small, trivial costs that add up over time. Common culprits include time-shares, too many fine dining experiences, reliance on public storage, and unnecessary insurance policies, all of which many retirees often regret.

Even subtler expenses can erode your financial stability, such as not using senior discounts, failing to shop around for cellphone plans, or maintaining credit card balances that could easily be cleared. Addressing these issues requires both mental fortitude and a willingness to make sacrifices.

Timing my IRA to Roth conversion wisely

Finally, although it doesn’t directly tackle inflation, converting my traditional individual retirement account (IRA) to a Roth IRA could help me hold onto more cash in the long run by reducing my tax liabilities on these retirement savings.

But prioritizing is crucial. For many individuals, for the majority of their lives, contributions to traditional IRAs are tax-deductible; the IRS treats this money as taxable income upon withdrawal.

Roth IRAs operate differently—they don’t allow for tax deductions on contributions, but any withdrawals in retirement are tax-free. Thus, since I’ll owe taxes on any money withdrawn from my traditional IRA—including 401(k)s—I plan to pay.

I aim to withdraw funds when my tax liability is the lowest.

So, how can I leverage these withdrawal guidelines? I have the choice to convert some or all of my traditional IRA into a Roth IRA, which allows for tax-free withdrawals afterward. The only requirement is that I must pay taxes on the entire amount in the year I convert it to a Roth.

This could be beneficial if I convert when the market is low and the account value has decreased, and if I have the necessary funds to cover the taxes during the conversion.

On the other hand, if I convert after a significant market increase, my account value may be higher, resulting in a larger tax bill from the conversion.

It’s important to note that Roth conversions are taxed as ordinary income. If the amount is substantial, it might push you into a higher tax bracket for that year. It may be wiser to convert just enough to incur the least amount of tax and consider postponing the conversion of the remaining balance of your traditional IRA to a Roth to a future year.

John Mackey, the former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has positions in Coca-Cola. The Motley Fool holds positions in and recommends Amazon and Nvidia. The Motley Fool follows a disclosure policy.

The Motley Fool is a partner of YSL News, providing financial news, analysis, and commentary aimed at empowering individuals to take charge of their financial futures. Its content is produced independently from YSL News.

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