It's hard to fund retirement living on Social Security alone.

There are plenty of options for affordable senior living in Cincinnati, but that isn’t a cure for all your financial worries. The inflation of prices can make living on a fixed income stressful and unsettling, even if you have less expensive rent.

At one time, inflation adjustments were made to Social Security payments only by infrequent, specific acts of Congress. Luckily for those dependent upon SSA income, the government passed legislation in the 1970s that allowed for automatic calculation and implementation of Cost of Living Adjustments (COLAs).

What is a COLA and how is it calculated?

The federal COLA is dependent upon the Consumer Price Index (CPI), calculated and published by the US Department of Labor's Bureau of Statistics (specifically the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W).

By law, a cost of living adjustment is automatically made to Social Security monthly payments whenever the CPI-W has increased between the third quarter of the last year a COLA was granted and the third quarter of the current year.

If inflation is flat for a year, no cost of living adjustment will be made, so you’ll want to keep track of these numbers when you plan your budget.

The Consumer Price Index-COLA link doesn't fully protect you from price shocks.

There are some difficulties associated with the calculation of the CPI.

The CPI is calculated based on the average price of a set of goods and services, called the "market basket," determined by the Department of Labor to be "core" expenses for the average American household.

The Bureau of Labor Statistics does not factor in the cost of goods and services with high price volatility— it surprises most people to learn that food and energy are among the items that the CPI does not take into account, even though these items are essential. This can cause unaccounted-for price shocks for seniors whose retirement is dependent entirely on their Social Security income.

For example, the doubling of average gasoline prices over the past decade (from under $1.50 / gallon in 2001 to well over $3.00 / gallon this year) is not directly factored into the CPI. To make matters worse, food prices are affected by fuel prices, because farm vehicles used to plant and harvest crops, and trucks used to transport produce from agricultural areas to supermarkets in Cincinnati, all use fuel.

When your retirement living is funded by Social Security, this is adding insult to injury.

Another challenge that comes with annual CPI calculation is that it is only done third quarter to third quarter, so any temporary, middle-of-the-year price spikes are not reflected in the end calculation.

If the price of cotton, for example, goes up in temporarily due to a bad harvest, and the price of clothing accordingly goes up for 6 months of the year, but falls again by the time the CPI is calculated again, a person on a Social Security who bought a new pair of slacks during the shortage must absorb a marginal loss.

As part of any financial plan for retirement living, it is smart not to place all your fiduciary eggs in the government's market basket. If you are planning now for your golden years, you should consult with a professional, reputable financial advisor and diversify your holdings.

There will be a COLA for 2014.

In the third quarter of this year, it was determined by the Department of Labor that the CPI-W had risen 1.5% since the last COLA, so Social Security payments for an estimated 63 million people will increase in January, 2014, by the same percentage.

By law, the age one may start drawing full SSA retirement benefits in 2014 is 66. Seniors who continue to work are able to draw the full Social Security retirement amount and still make up to $41,400 in gross (pre-tax) earnings for the year without seeing an SSA benefit reduction (the Social Security Administration will reduce your monthly payment by $1 for every $3 you earn over $41,400).

If, however, you turned 66 before 2014, and you are still working, you can earn an unlimited amount of money without incurring any penalty at all.

Remember, plan ahead for your retirement. Be smart.

If you are coming up on retirement, talk to a financial planner now and make sure that you know what income will be available to you monthly from your investments, pensions and government benefits. You'll want to diversify so that you can have income streams from independent sources.

Life as a senior should be about doing things you want to do— not worrying about making ends meet until you receive your next Social Security check.