Please educate me with Purchasing power protection

[silvia]

I plan to retire in 2017. Based on today's dollar, I will receive a monthly pension of $4300. I have two annual benefit adjustments upon retirement:

1. automatic benefit increase equal to 2 percent of your initial benefit
( this one I understand, will receive $86 increase every year but based on adding to $4300)

2. Purchasing power protection -one year supplemental benefit payments when benefit has fallen below a certain level of purchasing power. Purchasing power protection level is currently set at 85% of your initial benefit.

What does Number 2 mean? Roughly how many years will it take before I will receive the benefit on number 2 and what should my new benefit amount be instead of $4300.

Thanks in advance

[pb4uski]

It sounds like when the purchasing power of your benefit under option 2 is less than 85% of its initial purchasing power that the benefit would increase. I presume that the initial benefit of option 2 is more than $4300 a month.

At 2% constant inflation $1 would decline in purchase power to 85 cents in about 8 years. At 3% constant inflation $1 would decline in purchase power to 85 cents in about 5.5 years.

Of course, inflation is not constant and the critical item would be what measure of inflation is being used in measuring purchasing power and how it relates to your personal inflation and how much more the initial benefit is for assuming the inflation risk.

[silvia]

It would be $4300 per month in today's dollar. I have other retirement accounts. Is the 85% considered a good COLA?

[pb4uski]

It sounds like you could trade off a constant 2% COLA for a variable COLA that would be beneficial if we had rampant inflation but would be detrimental if we had low inflation. Unless you know what future inflation will be it is hard to make a judgement.

I'm not familiar with COLAs but 2% sounds pretty typical.

I think I would lean to the 2% COLA given that you are not getting a higher benefit with the other COLA, but that response may be a bit biased in that I don't anticipate rampant inflation in the future.

[unno2002]

You need to know how option two calculates the inflation rate.