Why Retiring Now Won’t Help You Cash In on the 2023 COLA

Federal employees planning to retire at the end of 2022 to take advantage of the large 2023 COLA are likely to be disappointed.

Federal employees planning to retire soon may be salivating at the thought of getting an 8.7% increase in their annuity payments next year. This sounds even more appealing as the 2023 COLA is the largest in about 40 years. Add in that 2023 federal pay raise is likely to be 4.6%, and an 8.7% increase in retirement income sounds very good.

However, before you retire at the end of 2022 and start spending that extra money, make sure you understand how the COLA is calculated and applied. If you do not understand how the COLA will apply to you, your 2023 income may be a big disappointment.

How Will Your 2023 COLA Increase Be Calculated?

First, it is important to understand how the cost of living adjustment (COLA) is calculated each year for federal retirees.

Here is how the COLA calculation works:

  • Consumer Price Index (CPI-W) readings are taken from the third quarter (July – September) of the current year.
  • These data are compared to the average CPI-W reading from the third quarter of the previous year (2021).
  • The average reading from the third quarter of the current year (2022) is compared to the figure from the third quarter of 2021.
  • If the average CPI-W reading goes up in 2022, then the difference, rounded to the nearest 0.1%, is what beneficiaries will receive as an increase in 2022.
  • If the figure is lower— indicating deflation—no adjustment is made. That happened several times under the Obama administration.
  • Using this method, we know the COLA increase in 2023 will be 8.7%.

The COLA calculations are different for those under FERS and for those under CSRS.

Calculating the COLA for FERS

  • For Federal Employees Retirement System (FERS) or FERS Special benefits, if the increase in the CPI is 2 percent or less, the Cost-of-Living Adjustment (COLA) is equal to the CPI increase. 
  • If the CPI increase is more than 2 percent but no more than 3 percent, the Cost-of-Living Adjustment is 2 percent. 
  • If the CPI increase is more than 3 percent, the adjustment is 1 percent less than the CPI increase. The new amount is rounded down to the next whole dollar. 
  • To get the full COLA, a retiree or survivor annuitant must have been in receipt of payment for a full year. 
  • If a person has not received the payment for a full year, the increase is prorated under both plans. Prorated accounts receive one-twelfth of the increase for each month they received benefits. Cost-of-Living Adjustments were first prorated in April 1982. 
  • Adjustments to benefits for children are never prorated. 
  • Federal Employees Retirement System (FERS) and FERS Special Cost-of-Living Adjustments are not provided until age 62, except for disability, survivor benefits, and other special provision retirements. 
  • FERS disability retirees get the adjustment, except when they are receiving a disability annuity based on 60 percent of their high-3 average salary. 
  • Also, under FERS, if you have a CSRS component, the component is subject to the CSRS COLA calculation.

Calculating the COLA for CSRS

For Civil Service Retirement System (CSRS) benefits, the percentage increase is applied to your monthly benefit amount before any deductions are withheld. The payment is rounded down to the next whole dollar. 

Of course, there are some exceptions to these calculations. As noted by the Office of Personnel Management (OPM): “A benefit will not be increased if it would cause the annuitant to receive payments in excess of any cap amount specified by law.”

Bottom Line on Calculating the 2023 COLA

For those who were asking how they can determine their 2023 COLA, your answer will depend on several variables, including which retirement system applies to you, how many months you started to receive your retirement payment in the past year, whether the FERS special benefits apply to you, your age, etc.

Be sure to check out our video explaining the COLA calculation process in greater detail, and if you need help with your personal situation, check with your agency’s human resources office and/or a financial advisor who specializes in working with federal employees for assistance.

How Will the 2023 COLA Impact Your Annuity For Those Retiring in 2022?

Readers have posted a variety of questions concerning retirement and the 2023 COLA. For example, some readers are wondering if they should retire before the end of the year, just in time to take advantage of the 2023 COLA.

This would not go as they are hoping, however. Here is why:

  • To receive the full COLA, you must have been receiving an annuity payment for a full year.
  • If a person has not been retired for a full year, the COLA payment will be pro-rated.
  • Pro-rated amounts are 1/12th for each month a retiree has received an annuity payment.

In other words, if you are planning on retiring in November to receive the full COLA for 2023, you will be disappointed. You may receive a very small amount of the annual COLA adjustment in your annuity check if you have not been receiving annuity payments for a full year.

Also, remember that your retirement annuity is based on your “high-3” years of your federal salary. The 2023 federal pay raise will most likely start with the January 2023 salary check. A higher salary will be paid out to current federal employees one month at a time. The final 2023 federal pay raise figure and corresponding 2023 GS pay tables (General Schedule) will not be announced until late this year, usually in mid to late December.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47