What Can Go Wrong

Relying too heavily on early predictions can lead to financial missteps. While a 3.8 percent forecast sounds promising, several factors can disrupt your expectations.

First, economic conditions change rapidly. If the Federal Reserve successfully cools the economy and inflation drops sharply during the summer months, the third-quarter data will come in lower than current projections. The final COLA announced in October could easily land closer to 2.5 or 3.0 percent. If you budget based on the higher prediction, you will face a shortfall come January.

Second, retirees frequently overestimate their net income by ignoring state taxes. While the federal government taxes Social Security based on provisional income, roughly ten states still tax Social Security benefits to varying degrees. Kiplinger regularly updates its state-by-state tax guides, which provide essential reading if you plan to relocate. Failing to factor state tax liabilities into your budget will leave you with less disposable income than you planned.

Finally, underestimating personal healthcare inflation remains a critical danger. Even if the COLA is robust, a new diagnosis requiring expensive tier-3 or tier-4 prescription drugs can decimate your monthly budget. You must plan for out-of-pocket medical maximums, not just baseline premiums.