Fed retirees are doing better because of the FERS Annuity’s indexing for inflation
It shouldn’t be a surprise that employees nearing retirement are more scared of inflation, per a recent survey by Schwab Workplace Financial Services®. Monthly costs (mentioned by 35% of participants) and stock market volatility (cited by 33% of participants) came in second and third, respectively, behind inflation, which was noted by 45% of survey respondents.
Should government workers be as concerned about inflation as poll participants are? The answer is “No.”
It’s not that inflation is unimportant; it’s just that federal pensioners experience it to a lesser extent than the typical retiree in the private sector.
Why? Because both the FERS annuity and the Social Security payout you will receive are indexed to inflation. The majority of workers in the private sector don’t get annuities like FERS, and for those who do, the payouts are usually not inflation-indexed.
The FERS cost-of-living adjustment (COLA) is based on changes in the Consumer Price Index (CPI) between the third quarter of one year and the next. The CPI may increase by 9% by the end of September 2021, when Social Security announces the COLA amount in the middle of October.
Since the FERS COLA trails the CPI by 1% in years with inflation of 3% or more, FERS retirees are likely to get a COLA of 8% or more. The full Social Security COLA is per the CPI.
FERS retirees will have access to social security, the FERS pension, and the Thrift Savings Plan as their three primary income sources. These three sources have been adjusted for inflation in two of them.
Nearly half of all retirees in the private sector will participate in a defined contribution plan like the TSP and receive Social Security benefits. Thus, inflation will have a negative effect on a more significant portion of their retirement income.
In the Schwab poll, one-third of participants were unsure of the lifespan of their funds. In a previous American Advisors Group® poll, 29% of respondents predicted that their financial situation would likely worsen before time ran out (although they would still have Social Security).
You won’t run out of funds from your FERS pension, Social Security, or any of those sources, leaving your TSP.
What steps could you take to ensure that your TSP balance won’t be depleted and that your withdrawals will be able to cover inflation? Here are a few ideas.
• Increase your TSP contributions while you’re still working to have more money when you retire. Remember that the amount you can contribute increases by the year you reach 50.
• Start with a specific proportion of your account each year (many financial advisors advise starting at 4%), then raise it each year by the rate of inflation to ensure that your withdrawals stay up with inflation. According to studies, using this method, sometimes known as the “4% rule,” increases your chances of not running out of money during retirement.
• You might want to think about choosing installment payments calculated using the IRS life expectancy chart if you plan to utilize your TSP as a source of ongoing income. Your payment will be revised by the TSP each year. The amount you withdraw would be adjusted upward in a “good” year and downward in a “poor” year since this re-calculation is based on your year-end balance (for example, the 12/31/2021 balance was used to compute the 2022 installment payments, etc.).
Keep in mind that this, too, shall pass. Yes, inflation has been high, but monetary policy has finally controlled it. Note that inflation has averaged 3% a year over the past century. High inflation may be there for a while, but it won’t last forever. Not to worry.
Contact Information:
Email: [email protected]
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Bio:
Mike was born in Chicago, Illinois on August 13, 1946. He was brought up in the
suburb of Skokie on Chicago’s northwest side and graduated from Niles Township (
East ) high school In 1964. Two years later he joined the US Air Force in November of
1966. After 2 years of Intense training he volunteered for Viet Nam and was sent to
Bien Hoa Airbase, which was 25 miles from Saigon, the nation’s capital. He
volunteered for a number of especially dangerous missions on his days off, such as
flying as a door gunner on a US Army helicopter and as a technical assistant on a
psychological operation on an Air Force O-1E observation aircraft. Capping off his
impressive accomplishments was winning the coveted Base Airman of the Month for
March 1969, a feat which was featured in the Pacific Stars And Stripes newspaper
read by every service man stationed in the Pacific theater of operations. After his
Viet Nam tour of duty he was stationed at Luke Air Force Base in Glendale, Arizona
where he met and married his wife, Lequita.
He graduated from Arizona State University in May, 1973, and after a 30-plus year
career as a financial advisor he joined a number of service organizations including
Easter Seals and Valley Forward, sponsor of EarthFest. He was also involved with the
National Federation of Independent Business and became the longest-serving
chairman of the Leadership Committee ever. He spoke before the ( AZ ) House Ways
and Means & Senate Finance committees. He then joined Disabled American
Veterans ( DAV ) in September of 2015. He rose quickly through the ranks and
became Chapter 8 Commander in May of 2019 where he served with Distinction for 3
years before being “ termed out”. The next year, as Vice Commander, he won the
title of National Champion Recruiter!
