While it is virtually impossible for a federal or postal retiree to run out of money, it is possible to run dangerously low — even with an annuity indexed in whole, or part to inflation. Civil Service Retirement System (CSRS ) retirees get full COLAs (cost of living adjustments) according to the rise in inflation as measured by the Labor Departments Consumer Price Index (CPI-W). Retirees under the Federal Employee Retirement System (FERS) plan, which includes most current workers, get a diet-COLA that is reduced by one percentage point when the CPI goes over 2%. Social Security is also fully indexed to inflation.
Many, if not most, private sector workers who have company-backed pension plans don’t get any inflation protection. Ever. 30 years after retirement they are still collecting the same amount they got in their first pension check. Imagine a monthly income in 1980s dollars while trying to live in the 2020s. And retired feds don’t run out of money. They can, even with COLAs, and especially the diet-COLA, run low on money. Even though inflation has gone upward. Sometimes big time. A COLA that reduced 1% in times of higher inflation. When you need the protection the most.
The reason?
Good news and bad news — often it happens to be the same thing. Good news is that people are living longer. Bad news is you could be one of them. Your retirement could easily last as long as your federal career. Maybe longer. And that costs money and gets more expensive over time. Earlier this year, there was an obituary in The Washington Post. It was about a 99-year old federal worker who retired in 1983. Think about that! Do the numbers! That’s a long time, three plus decades, to keep up with inflation.
In most cases, the higher your starting annuity the better off you will be. But still…
If you are one of the 75,000 feds with million dollar TSP accounts and are under the old CSRS, your financial life in retirement should be pretty good. But most people don’t have anywhere near that amount in their federal 401k plan. Also, most will retire under the FERS, which has a diet-COLA formula, meaning that over time their monthly annuity payments can be drastically reduced by inflation.
So what are your options if you are still working?
Work until you drop? Wind up staying 5 years longer than you planned? Leave only to find out later you really couldn’t afford it?
You have to live with your decision. That is a challenging thought! But you can do it, and do it right with a little thought and preparation.
Today’s guest on Your Turn is Tammy Flanagan. She’s a former fed who is an expert on all phases of retirement. And while retirement planning isn’t rocket science, in some ways it is more challenging because ultimately you’ll be riding that rocket until it, or you, run out of gas. And that’s what we’ll talk about beginning at 10 a.m. ET streaming live here or on the radio at 1500 AM in the Washington D.C. area.
She will be talking about eligibility to retire, health and life insurance — and your FEHB plan. What kind of insurance will you need? What about state taxes on your benefits (many don’t tax them)? How much will you need in retirement to maintain, or even improve, your standard of living?
