Federal retirees have an advantage over many in the private sector in that their annual retirement income goes up each year. It is pegged to the inflation rate and it happens automatically.
In theory at least, tens of thousands of federal employees are contemplating their retirement as they plan to walk out the door of their federal office for the last time as an active federal employee in the next several years. Most of these folks have given a lot of thought to what they want to do from hitting the beach to world travel. Here are a couple of thoughts about your financial future and how you should think about your finances as you head into retirement.
This year, the COLA (cost of living allowance) went up 2.3% for many federal retirees. That isn’t a huge increase but, on the bright side, at least it is an increase. The average increase for active federal employees this year is 3.5%, although that varies widely between locality pay areas. (In the Washington, DC area, for example, the raise will be 4.49% this month; it will be 4.23% in San Francisco and 2.96% in Indianapolis. See the article on Understanding the 2008 Federal Pay Raise for more.)
There are years when the retiree rate goes up higher than the pay increase for active federal employees. Last year, for example, many federal retirees received a 3.3% pay hike. Retirees got 4.1% in 2006 while the average GS federal employee got less than 4%. But the reality is that while you may be able to count on an annual increase, it may not really keep up with inflation. Hopefully, you have carefully balanced your TSP portfolio after putting the maximum amount possible into your TSP funds each year. With a balanced portfolio between stocks and bonds, you have a good chance of actually having enough money, even with the FERS system, until you did.
Here is the good and bad news for current and future retirees. Inflation may be kicking in again. In December, the Labor Department’s Bureau of Labor Statistics reported that the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for November 2007 was 205.8 , up 0.8 percent from October’s index of 204.3. For purposes of calculating the next cost-of-living adjustment (COLA), scheduled for December 2008, the index has risen 1.1 percent.
Former federal employees now receiving monthly benefits under provisions of the Federal Employees Compensation Act (FECA) receive a COLA based on the change in the CPI-W during each calendar year. The November index of 205.8 is 4.4 percent higher that the December 2006 index of 197.2.
Monthly % Change% Toward Next COLA0.20.30.81.1
While federal retirees have the benefit of an increasing retirement check each year, the way in which the annual COLA is calculated does not necessarily accurately reflect the expenses of many retirees. Many people are installing new high definition TV sets—perhaps to watch more TV after they retire. The cost of electronic equipment such as this has dropped and that lowers the cost of inflation. But the cost of health insurance and medical services has been going up. The cost of health insurance is not directly influenced by the wage costs in China or South Korea. While the cost of many consumer goods had dropped because of globalization, that does not reduce your medical payments. Your annual COLA increase is determined by a wide variety of products and services so a retiree may find the increases in costs is higher than the annual increase unless you went crazy and spent much more for your fancy new TV and stereo system that common sense would dictate. (Also see COLA’s, Inflation and Planning Your Retirement)
Happy New Year to all of our readers from those of us at FedSmith.com. We realize that many readers will be retiring. We hope you will take the time to switch your subscription to your home email address instead of your work address (or in addition to it) so you will continue to receive you free daily newsletter via email. It is free so the rate of inflation won’t impact your ability to keep up with events and news on the federal community that you are part of and will continue to be part of–even after retirement.