COLA questions

[Texarkandy]

A sizable part of my ER income will be federal pension under the newer FERS plan. (the older CSRS system gets a better deal)

The pension is COLA'd to the CPI as follows:
CPI = less than 2%
COLA = CPI increase

CPI = between 2% & 3%
COLA = 2%

CPI = greater than 3%
COLA = CPI minus 1%

I understand there are others with pensions & annuities with COLA's tied to the CPI as well as various other indexes - I don't know all the details, but I also understand the CPI is not necessarily reflective of true inflation in col for the average person.

Since I am planning to semi-ER fairly early (around age 50) I am curious and would welcome the thoughts of forum members (some of whom are more financially astute than I) as to how my pensionmayl degrade over the long term (20, 30 years) under these CPI COLA rules.

 

[W2R]

A sizable part of my ER income will be federal pension under the newer FERS plan. (the older CSRS system gets a better deal)

The pension is COLA'd to the CPI as follows:
CPI = less than 2%
COLA = CPI increase

CPI = between 2% & 3%
COLA = 2%

CPI = greater than 3%
COLA = CPI minus 1%

I understand there are others with pensions & annuities with COLA's tied to the CPI as well as various other indexes - I don't know all the details, but I also understand the CPI is not necessarily reflective of true inflation in col for the average person.

Since I am planning to semi-ER fairly early (around age 50) I am curious and would welcome the thoughts of forum members (some of whom are more financially astute than I) as to how my pensionmayl degrade over the long term (20, 30 years) under these CPI COLA rules.

I will have a FERS pension, too. It will not keep up with the CPI over time. However, it will be smaller than my TSP income and smaller than my social security and way smaller than a 4% SWR of my investments. I am not that worried about it.

A lot of people with CSRS pensions feel that even the full CPI increase is not enough to match their personal rates of inflation, anyway. I guess the latter is a very personal thing, depending on how you allocate your budget.

 

[WilliamG]

Social Security COLA for 2009 could top 6%

Largest Social Security COLA Increase in Over 25 Years May Greet Senior Citizens in 2009

 

[Helena]

Social Security COLA for 2009 could top 6%

Largest Social Security COLA Increase in Over 25 Years May Greet Senior Citizens in 2009

It is exactly at 6 percent as of today.

Add in next month, whatever that will be... we'll know on October 16, 2008.

Good info on this website:

National Active and Retired Federal Employees Association


~

 

[MasterBlaster]

An increase based on the CPI "Basket of Goods" will only reflect your situation if you spend your money in the same proportion as the index. Traditionally retirees spend quite a bit more on health care and travel than the index. Health care has been rising much faster than the CPI index.

So barring some sort of national health care system, you are likely to somewhat experience a decreasing standard of living over time.

 

[W2R]

An increase based on the CPI "Basket of Goods" will only reflect your situation if you spend your money in the same proportion as the index. Traditionall retirees spend quite a bit more on health care and travel than the index. Health care has been rising much faster than the CPI index.

So barring some sort of national health care system, you are likely to somewhat experience a decreasing standard of living over time.

Good point. This is why depending on a pension and SS only is not necessarily a perfect retirement strategy. Equity investments, whether in the TSP, a Roth, taxable investments, or whatever, can help to combat inflation, generally speaking.

Obviously I am ignoring recent abysmal economic/market events.

 

[rickier55]

CPI is a gauge - it's useful for that purpose. It's also interesting to look at on Regional basis.

I've monitored my expenses for over 10 years - and the year to year changes are highly variable to me. The largest annual increase was 13.4% and the biggest decrease was -10.8 (these surprisingly were not years close together).

But I still value the CPI and though it may understate real inflation, having one pegged to it is still a lot better than what quite a few folks deal with.

Rick

 

[donheff]

IIRC your FERS pension doesn't get the COLAs until you are 62. If so, you need to calculate that delay in.

 

[jazz4cash]

Yeahbut.........

An increase based on the CPI "Basket of Goods" will only reflect your situation if you spend your money in the same proportion as the index. Traditionally retirees spend quite a bit more on health care and travel than the index. Health care has been rising much faster than the CPI index.

So barring some sort of national health care system, you are likely to somewhat experience a decreasing standard of living over time.

Wouldn't the increase in healthcare costs be less for FERS retirees due to thier retirement healthcare benefit (compared to non-Fed retirees)?

 

[haha]

A lot of people with CSRS pensions feel that even the full CPI increase is not enough to match their personal rates of inflation, anyway.

I hope it can be counted on to be better than the no COLA or no pension options.

 

[Texarkandy]

IIRC your FERS pension doesn't get the COLAs until you are 62. If so, you need to calculate that delay in.

My pension is COLA'd from day one with no reduction for age as I am retiring under a special provision of FERS.

Special Retirement Supplement (SRS) also starts on day 1 but is not COLA'd & means testing starts at age 55 for that portion.

 

[Texarkandy]

Wouldn't the increase in healthcare costs be less for FERS retirees due to thier retirement healthcare benefit (compared to non-Fed retirees)?

Healthcare premiums/options will continue at the same costs as active employees - (not free - but not outrageously expensive either in comparison to non-group plans)

 

[Texarkandy]

CPI is a gauge - it's useful for that purpose. It's also interesting to look at on Regional basis.

I've monitored my expenses for over 10 years - and the year to year changes are highly variable to me. The largest annual increase was 13.4% and the biggest decrease was -10.8 (these surprisingly were not years close together).

But I still value the CPI and though it may understate real inflation, having one pegged to it is still a lot better than what quite a few folks deal with.

Rick

Thanks rick -

I did a little research & found the pension portion of my FERS retirement package will be COLA'd to the CPI-W.

I ran some numbers projecting 50k pension over 30 years and assuming 4% increase in CPI-W each year & 3% COLA. Seems after 30 years my pension had lost 24% of it's purchasing power (assuming of course CPI is actually reflective of cost of living)

I ran another set of numbers to calculate how much $ would need to be invested at 4% to make up the shortfall in COLA & CPI increase (withdrawing of course the amount of the shortfall each year for personal income). Seems it would take 191K - sound right anyone?

Looks like the federal govt saved themselves a bundle introducing this CPI - 1% "diet COLA" on FERS employees. (Former CSRS employees get the full CPI increase for their COLA.)

(At least my TSP is holding - 100% G since last summer, got nervous when the subprime thing started up & bailed out - no losses but I know I'm not quite pacing inflation and I'd sure like to actually "make" some money in it again.)

 

[Texarkandy]

An increase based on the CPI "Basket of Goods" will only reflect your situation if you spend your money in the same proportion as the index. Traditionally retirees spend quite a bit more on health care and travel than the index. Health care has been rising much faster than the CPI index.

So barring some sort of national health care system, you are likely to somewhat experience a decreasing standard of living over time.

Thanks MasterBlaster (BTW - your screen name is not indicative of a former profession is it?)

I've got health care covered via FEHB (premiums rising every year, of course - like everybody else) & mortgage will be paid. Travel of course is desirable, but flexible and optional depending on how things go.

Am curious as to what other items in the CPI-W might not be reflective of actual cost of living?

 

[W2R]

Texarkandy, I don't know the answer to your question but it is interesting. Naturally the answer depends on your own personal lifestyle and how various factors are weighted. According to the BLS website, major categories used in determining the CPI are:

• FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
• HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
• APPAREL (men's shirts and sweaters, women's dresses, jewelry)
• TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
• MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
• RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
• EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
• OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

Personally, I think that in retirement I will spend more on food and beverages than the normal American since I like high quality food and I am willing to pay for it. I will probably spend more on recreation, too. I might spend more on apparel at first since I will need cold weather clothing.

I am pretty sure I will spend less on medical care, and education expenses, and housing than most.