If you are in your 50’s, under FERS, and planning to retire soon then there is something you need to know. Basically, if you meet the above criteria then you might be caught in the middle of an unlucky combination.
Note: If you are a special provision FERS (ie Firefighter, Air Traffic Controller, Law Enforcement) then you might just be exempt from this.
The Silent Killer
Inflation is the silent killer in retirement. It is often slow and hard to notice at first but has an incredibly large impact over time.
But for those retiring soon then this impact may be a lot more sudden then it has been in the past. Let me tell you why.
Diet COLA
In retirement, your pension receives COLAs, or cost of living adjustments, which are basically pay raises every year based on what inflation did the year before.
These COLAs are a huge help in maintaining your standard of living over time.
But as a traditional FERS employee, your pension doesn’t receive any COLAs until you are 62. This means that if you retire in your late 50’s, then you will have a number of years during which you are highly vulnerable to inflation.
For example, if you retire at 57, then your pension won’t receive any COLAs for the first 5 years, and if inflation is higher than normal during these 5 years, then your pension can lose a good chunk of its buying power.
Just imagine if inflation was 3% during all 5 of the years with no COLAs. This would mean that your pension would lose 15% of its buying power!
Special Provisions
Like I mentioned before, as a special provision FERS federal employee (ie Firefighter, Air Traffic Controller, Law Enforcement) you may not be subject to this COLA gap.
As the rules stand today, as long as you retire with a full special provision retirement then your pension will receive COLAs before 62 and beyond.
What Can I Do?
Whenever there is inflation, prices go up but this price increase doesn’t just apply to consumer goods. It also (in most cases) means that the prices of real estate and the stock market go up as well.
This means that as a federal employee, a good way to help hedge against inflation is by investing your TSP (or other investments) in a smart way, because if the value of the stock market increases, then so will the value of the C, S, and I funds.
There is no way to know what the future holds, so it is up to us to prepare for the unexpected as best we can.
