Inflation is an enemy of our Thrift Savings Plan balance and of the income that we hope to receive from the TSP in our retirement. It can eat away at the purchasing power of our Thrift Plan and erode our future income.
As federal employees/retirees we have inflation protection built into our annuities and into Social Security, but there is no such protection built into our TSP.
COLAs for Federal Retirees
Social Security is fully indexed for inflation based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). In January 2020, Social Security recipients will receive a 1.6% Cost of Living Adjustment (COLA), while in January 2019 they received a 2.8% COLA.
FERS retirees do not receive a COLA on the Retiree Annuity Supplement (RAS) that they receive prior to attaining age 62. Even though the RAS is based on the retiree’s Social Security entitlement, it is paid by the Office of Personnel Management (OPM) and is not entitled to a COLA.
Federal annuities are also indexed for inflation. CSRS annuities receive a full COLA (the same as for Social Security) beginning at retirement.
FERS annuities, on the other hand, have a modified COLA formula that, in some years, results in a lower COLA adjustment than either Social Security or CSRS payments receive.
- If inflation is under 2%, the retiree gets a full CPI increase. So for 2020, a FERS retiree that is entitled to a COLA gets the full 1.6%.
- If inflation is between 2% and 3%, the retiree gets a 2% increase. So for 2019, FERS retirees who were entitled to a COLA got 2%, not the 2.8% that the CPI went up.
- If inflation is over 3%, the retiree’s COLA will trail the CPI by 1%.
In addition, most FERS retirees do not begin earning a COLA until they reach the age of 62. Only special category employees (e.g., law enforcement officers, firefighters, air traffic controllers, etc.) begin earning a FERS COLA at the time of retirement.
There is also a COLA payable to FERS disability retirees in their second year of disability retirement and beyond. In the first year of COLA eligibility, the amount of the COLA is prorated based on the number of months in the COLA period that the individual was retired.
Protecting the TSP from Inflation
The TSP, on the other hand, does not automatically receive COLA. If you are going to use your TSP to provide a stream of income, you will have to figure out how to adjust it for inflation if you do not want to lose purchasing power.
The TSP does offer an option for those who choose installment payments where you can choose payments based on the IRS life expectancy table. If you elect this option, your payments will be determined on your year-end balance and the age you turn during the year.
For example, they would have used your 12/31/2018 balance and the age you turned during 2019 to determine this year’s payment. This generally results in payments that increase each year, though payments get adjusted downward during the year that you reach 70 ½; from that point onward, payments are calculated the same way that required minimum distributions are.
TSP annuities are the least popular withdrawal option, but they do offer an “increasing payment” option that will adjust payments by inflation, though they will increase no more than 3% per year.
You’ll need to pay attention to your TSP once you begin taking money out and manage your payments much the same way as you managed your contributions during your working career.