What a COLA is
A cost-of-living adjustment (COLA) raises your pension a set percentage every year to keep up with inflation. A 2% COLA means each year's check is 2% bigger than the last — and because it compounds, the effect over a 25- or 30-year retirement is far larger than it first looks. The calculator above shows the total extra a COLA delivers.
Why it matters more than people think
Without a COLA, inflation quietly shrinks what your pension buys. At 3% inflation a fixed pension loses about half its purchasing power over 24 years — the check is the same, but it buys half as much. A COLA protects you from that slow erosion, which is why a COLA'd pension is worth meaningfully more than one without.
COLA and the lump sum decision
This is a big reason to think twice before trading a COLA'd pension for a lump sum. To match a rising pension, an invested lump sum has to earn enough to both provide income and grow with inflation every year. Weigh it with the lump sum vs monthly calculator and, for an offer, the buyout calculator.
Common questions
Do all pensions have a COLA? No — many private pensions don't, while most government and military pensions do. Check your plan.
Is the COLA guaranteed? Some are fixed, some tied to inflation with a cap, some can be suspended in hard years. Read the terms.
Does Social Security have one? Yes — it adjusts for inflation each year, one reason it's such a valuable piece of retirement income.