Will Your Money Last Through Retirement?

The CSRS, or Civil Service Retirement System, is the older retirement system for federal employees, with most current workers to be retiring under FERS, or Federal Employees Retirement System. But for a lot of folks who are already past their working years, CSRS is what they have. The CSRS is an annuity program that lasts the rest of the retired employee’s life and is based on how long you were employed and how much you got paid. It’s adjusted for inflation, meaning each year the Bureau of Labor Statistics determines how much of a percentage your annuity increases. It is determined by the third-quarter average of the Consumer Price Index from the year prior and applies to CSRS annuities on January 1st.

FERS functions quite differently though, and for folks who’s retirement is looming on the horizon, knowing what to expect is of paramount importance. The money that they put into the Thrift Savings Plan will be a more significant piece of the retirement pie going forward, which is based on an installment payment that the retiree has determined, and can be adjusted, but does not adjust itself for inflation. Over time, this could spell trouble.

The COLA, or Cost of Living Adjustment, is an important perk to any annuity. People retired under CSRS will receive a full adjustment, meaning if the inflation goes up 3 percent, then their annuity will match that. Social Security functions quite similarly. But for FERS retirees, there is a cap to the amount that their COLA will increase, and anything past 2 percent will not be taken into account when the adjustment is made. While your paychecks from an annuity might go up, the amount in your account will continuously decline. If inflation rises 3 percent, your FERS annuity only goes up 2 percent.

The problem with this is time. And after many years, if the rate of inflation consistently is higher than the adjustment, the disparity will increase. Even at a 3 percent rate of inflation, you could lose nearly 31 percent of your annuities purchasing power over the course of 20 years.

Their solution to this is the TSP, and other investments you may have, but those too are limited resources, and decrease over time. Still, going forward, your best bet for a healthy retirement involves a balance of all investments and not just your annuities.

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