Fed Retirees Have It Better With Inflation-Indexed FERS Annuity

Inflation is the No. 1 concern for employees approaching retirement, according to a recent survey by Schwab Workplace Financial Services®. After inflation, which was cited by 45% of those polled, employees were also concerned about keeping up with monthly payments (35%) and stock market volatility (33%).

Should government employees be as worried about inflation as those polled? No. I’m not saying that inflation isn’t a concern; I’m simply saying that it’s less of a problem for government retirees than it’s for the typical private-sector retiree. Why? Because the FERS annuity, like the Social Security pension you’ll get, is inflation-indexed. Most private-sector employees don’t have annuities like FERS, and many who do have annuities (also known as pensions) don’t have their payments adjusted for inflation.

The FERS cost-of-living-adjustment (COLA) is based on the change in the Consumer Price Index (CPI) from one year’s third quarter to the following year’s third quarter. Social Security announces the COLA amount in mid-October, and it’s not out of the question that the CPI will be up 9% from where it was at the end of September 2021. In years where inflation is 3% or greater, the FERS COLA lags behind the CPI by 1%; therefore, FERS retirees are likely to get a COLA of 8% or more. Social Security’s COLA fully tracks the CPI.

FERS retirees will have three primary sources of income: Their FERS annuity, Social Security, and the Thrift Savings Plan. Two of these three sources are inflation-adjusted. All private-sector retirees will have Social Security, and around half will have a defined contribution plan comparable to the TSP; as a result, a greater proportion of their retirement income will be affected by inflation.

Returning to the Schwab survey. One-third of poll respondents were unsure how long their funds would last. A prior poll conducted by American Advisors Group® discovered that 29% of respondents felt they would run out of money before they ran out of time (though they’ll still have Social Security).

You’ll neither run out of money from Social Security nor will you run out of money from your FERS pension. What can you do to ensure that you will not run out of money from your TSP and that your TSP withdrawals will stay up with inflation? Here are some ideas.

• Increase your TSP contributions while you’re still working so you’ll have more money when you retire. Remember that the amount you may contribute increases in the year you reach 50.

• To keep up with inflation, start taking a particular proportion of your account each year (many financial advisers recommend starting with 4%) and increasing your withdrawals by the inflation rate each year. According to studies, this method (known as the 4% rule) increases your chances of not running out of money throughout your retirement.

• If you intend to utilize your TSP as a source of income, consider making monthly payments based on the IRS life expectancy calculation. Each year, the TSP will recalculate your payment. Because this re-calculation is based on your year-end balance (for example, the December 31, 2021 balance was used to compute the 2022 installment payments, etc.), the amount you withdraw will be adjusted upward in a “good” year and downward in a “bad” year.

• Keep in mind that this, too, shall pass. Yes, we have experienced significant inflation in the past, but monetary policy has finally brought it under control. Consider that inflation has averaged 3% annually over the previous century. We may be experiencing a time of high inflation, but it won’t last forever. Don’t freak out.

Contact Information:
Email: [email protected]
Phone: 7242723902

Bio:
Craig E. Vukich is a 35 year retirement specialist and Financial Advisor who has helped thousands of clients all over the country with their investment portfolios and retirement strategies.
In that time, Craig has also helped seniors and retirees with their Medicare options as healthcare continues to be one of the most confusing issues facing people today.
Personally, Craig lives in Beaver Falls, Pa with his beautiful wife and childhood sweetheart Barb and their lovely daughter Shalyn.
Craig is a graduate of Westminster College which is about an hour north of Pittsburgh. Craig is a recreational golfer and traveler and Pittsburgh sports fanatic.

Disclosure:
This information is not a complete analysis of the topic(s) discussed, is general in nature, and is not personalized investment advice. Nothing in this article is intended to be investment advice. There are risks involved with investing which may include (but are not limited to) market fluctuations and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making any investment decision. You should consult a professional tax or investment advisor regarding tax and investment implications before taking any investment actions or implementing any investment strategies.