By: Dan Miller, CFP®
Federal Employees close to or in retirement are often aware of the detrimental effects inflation can have on retirement savings. As the cost of goods rises, the value and buying power of many retirement accounts diminish. And for some federal and postal workers, maintaining their savings and lifestyle may become a challenge.
Unlike private employees, many federal workers can retire with a reasonable annuity that is indexed to inflation. However, there is still a need to think about different strategies they can use to adjust for inflation and help protect the value of their retirement. Below we’re discussing some of the ways inflation affects retirement and how federal employees can prepare.
How Is Yearly Inflation Calculated?
Inflation is calculated using the Consumer Price Index (CPI) which calculates inflation across major categories before determining a yearly inflation rate expressed as a percentage.1
On average, the U.S. experiences an inflation rate of roughly three percent.2 This percentage and the percentage expressed by the CPI are helpful for understanding inflation across multiple markets. But these values should also be understood as a general approach, meaning the real impact of inflation will depend on the individual.
For example, we might assume that a retired federal employee might need to withdraw an additional three percent from their savings each year in order to adjust for inflation. But this isn’t the whole picture. Instead, this retiree should consider the specific ways that inflation affects them.
Considering Individual Costs
Inflation affects each of us differently. For example, the rising cost of gasoline would affect someone that drives long distances more than someone without a vehicle.
Retirement acts in a similar fashion, as it creates a lifestyle change that causes inflation to affect retirees differently. As a federal worker, you do have some protection against inflation.
- If you're under the Civil Service Retirement System (CSRS), every January you'll have a cost-of-living adjustment (COLA) based on the Bureau of Labor Statistics determination of rising costs.
- If you're under the newer Federal Employee Retirement System (FERS), your adjustment is based on a diet-COLA formula. "If inflation is 2% or less, they get a full COLA. If inflation is higher, retirees get the COLA minus 1%. Better than most private plans, but still can be a problem (Mike Causey)."
The best way to determine the cost of inflation is to examine your personal lifestyle and make adjustments.
Managing the Effects of Inflation
With the above in mind, here are some ways to help offset inflation during retirement, as a federal worker.
Social Security (FERS)
The Social Security Administration provides the Cost-of-Living-Adjustment (COLA) to offset some of the effects of inflation by raising Social Security benefits.4 This can be an important source of income during retirement.
However, the COLA is also based on the CPI-W, meaning some individuals may not be able to rely on adjustments from Social Security to make up for all cost increases.4
Investments that Adjust with Inflation
Certain investments can adjust with inflation. However, all investments come with risk, something that should always be considered during retirement.
Be sure to consult with your financial advisor before making any investment decisions.
A Change in Lifestyle
Consider your retirement goals and overall lifestyle. Is there something you can trim back on to save on the cost of inflation? This does not mean you need to give up on retirement goals. Rather, what can be adjusted to help you achieve them while maintaining your savings?
This is by no means a comprehensive list of all the ways to protect your retirement savings against inflation. Rather, it is intended to demonstrate some of the options available to you, as a federal employee. Consult with your financial advisor who understands your federal benefits to acquire a better understanding of how inflation will affect you, and what you can do to help protect your retirement savings.