Preserving the buying power of a pension

[militaryman]

Hi friends!

If I have a pension that does not have a cola what would be a prudent amount to save in an etf index fund each year of the pension so that the buying power of the pension is preserved. Is it as simple as finding the CPI each year and saving that amount off the top of the next year's pension payment?

I will start my fers pension in 3.5 years at about 57 y.o. But will have no cola until 62 ad then it is a "diet cola"
(If the increase in the Consumer Price Index that is used to compute the COLA is 2% or less, the COLA is equal to the CPI increase. If the CPI increase is more than 2% but no more than 3%, the COLA is 2%. If the CPI increase is more than 3%, the adjustment is 1% less than the CPI increase. )

How would I compensate for this in retirement planning to equate a level pension amount throughout without saving too much?

 

[TheWizard]

Another way to approach this situation is have a few hundred $K in investments at start of retirement which you could draw on to supplement that pension as time goes on.
I like that idea better...

 

[gauss]

Former Boeing Aerospace President "Bud" Henry K. Hebeler (RIP) has written several books and a web site that gives a methodical way to get to this answer that I found useful.

The books include:
J.K. Lasser's Your Winning Retirement Plan
and
Getting Started in A Financially Secure Retirement

I think that as a confirmation this can also be modeled in FireCalc and/or I-Orp.

-gauss

 

[street]

So, you are talking about inflation. I would say one way to fight inflation is to stay invested in stock market for the long haul. If you can don't sell your holding etc..

Investing and stay invested. While switching to a more conservative portfolio seems like the safe option, diversifying with a mix of investments makes the most sense when protecting your portfolio against inflation.

 

[NW-Bound]

How would I compensate for this in retirement planning to equate a level pension amount throughout without saving too much? ��

Another way to approach this situation is have a few hundred $K in investments at start of retirement which you could draw on to supplement that pension as time goes on.
I like that idea better...

I have spent only a few minutes on this, and here is my thinking.

In the worst case, your pension with a diet COLA will run behind inflation by 1% each year. How do you make up for this? You need another source of income that gives you a supplemental 1%. But next year, your pension may be another 1% short, and now you need 2% extra, and so on. If high inflation persists for a few years, your supplemental requirement can grow quite large.

If you have an extra stash to draw on, you will have to draw more and more on it. That stash will have to generate more and more income, meaning it has to have a return far exceeding inflation. There's no such thing.

It follows then that this stash will dwindle with time. And this is OK if it is large enough to last your lifetime.

Now, how large is that? If we want to get more specific, then we need to model how bad inflation is going to be, and some assumption on what kind of return that stash can generate.

Seems to me like one can draw on past historical data to model the above. FIRECalc can model either a full COLA'd income, or a non-COLA one, but it does not have a diet COLA model.

Is there another calculator that can do this?

 

[old medic]

My pension will not have a set COLA, but has gotten a small increase every few years.
Wife is the same. We both have 401Ks for some reserve funds if needed.

 

[militaryman]

Seems to me like one can draw on past historical data to model the above. FIRECalc can model either a full COLA'd income, or a non-COLA one, but it does not have a diet COLA model.

Is there another calculator that can do this?

Thanks for all the replies! Haven't found the "diet cola" pension modeling yet. I do have a decent TSP account that I will be using to keep me from drawing SS until 70 (67 for spouse) and there should be enough to cover inflation but was just wondering if there was a rule of thumb that could neatly compensate for an ever decreasing value of a pension that is not indexed to inflation via a full cola.

On a different track somewhat but kinda tied to it is the idea that my FEHB premiums and Dental Premiums will come from my FERS pension and health care cost usually rise MUCH faster than inflation. SO the premiums will be taking a bigger and bigger chunk of the FERS pension and 15 years or so down the road it could look like a paltry amount that actually gets paid to my checking account after the premiums are taken out. So I was wondering if it would be too risky to at 65 years old just use Medicare and Tricare (suspend FEHB) which I should qualify for (retired Guard) at 60 years old?

 

[militaryman]

Also what about from age 60-65? Anyone in my boat (Retired reserves/Guard and Federal Retiree also) use Tricare Prime and a very low cost FEHB premium plan as a backup? OR Tricare alone?

 

[jollystomper]

Another way to approach this situation is have a few hundred $K in investments at start of retirement which you could draw on to supplement that pension as time goes on.
I like that idea better...

+1

This is what I have done with my non-COLA pension. I prefer this simpler approach. I put enough in cash to supplement it until I start drawing SS.

 

[Chuckanut]

Seems to me like one can draw on past historical data to model the above. FIRECalc can model either a full COLA'd income, or a non-COLA one, but it does not have a diet COLA model.

FWIW, I 'solved' this problem by splitting my pension in half. One half is labeled as non COLA'd and the other half is labeled as COLA'd. It's an estimate of course, but I can't help thinking it must be more accurate than choosing 100% no-COLA or 100% full COLA'd which I know for certain is not correct.

Just for kicks I ran FireCalc with my pension fully non COLA'd and SS cut by 25%. I would have to eliminate my occasional weekend trips to Paris for dinner at Alain Ducasse au Plaza Athenee (fixed price - $425), but, I won't lose the farm. Besides, I can always make up a big pot of 'bachelor stew' at home that will feed me for a long weekend.

If the cost of living should skyrocket I can change the percentages allocated to COLA and non-COLA and rerun FireCalc.

 

[militaryman]

If I can figure out the FEHB suspend thing and still maintain good coverage then I think that will more than make up for my inflation compensation as well as eliminating one of the biggest inflation eating portions of my budget (healthcare premiums) The plan I currently carry with FEHB is $4918/year in premiums and switching to Tricare when allowed at 60 would exchange that $4918/yr for $606/yr in todays dollars.

https://www.nitpinc.com/tricare-plus-fehb-a-possible-health-benefits-ace-in-the-hole-arrangement-when-you-retire/

 

[pacergal]

OP
There is a long time member and former moderator here, Nords, who has written much about military retirement/benefits/etc.
Look under FAQs or look him up and try to pm him.
I am not military, but have learned much from his posts in the past.

 

[NW-Bound]

FWIW, I 'solved' this problem by splitting my pension in half. One half is labeled as non COLA'd and the other half is labeled as COLA'd. It's an estimate of course, but I can't help thinking it must be more accurate than choosing 100% no-COLA or 100% full COLA'd which I know for certain is not correct.

Just for kicks I ran FireCalc with my pension fully non COLA'd and SS cut by 25%. I would have to eliminate my occasional weekend trips to Paris for dinner at Alain Ducasse au Plaza Athenee (fixed price - $425), but, I won't lose the farm. Besides, I can always make up a big pot of 'bachelor stew' at home that will feed me for a long weekend.

If the cost of living should skyrocket I can change the percentages allocated to COLA and non-COLA and rerun FireCalc.

Hey, that sounds like a reasonable approximation to me.

About Michelin rated restaurants, I have not been to one. One of these days...

I would have to bring nice clothes and formal shoes with me on a trip, and that brings another complication.

 

[ExFlyBoy5]

Also what about from age 60-65? Anyone in my boat (Retired reserves/Guard and Federal Retiree also) use Tricare Prime and a very low cost FEHB premium plan as a backup? OR Tricare alone?

Not sure why you would want/need a backup plan if you are eligible for Tricare Prime. The max OOP is *only* $3,000 year (if you are group A which I am guessing you are). I don't know if there is a difference in the Prime cost between reserve/guard retirees or active duty retirees (my case) but I don't think there is except the group A and B differences.

 

[militaryman]

Not sure why you would want/need a backup plan if you are eligible for Tricare Prime. The max OOP is *only* $3,000 year (if you are group A which I am guessing you are). I don't know if there is a difference in the Prime cost between reserve/guard retirees or active duty retirees (my case) but I don't think there is except the group A and B differences.

Thanks, I am hoping that is right --- Just didn't know if for some reason you need to choose an "out of TRICARE network" specialist for a procedure (that FEHB would cover if you had as backup) if that would come into play. Like whether any provider out of network counts towards the $3,000 max OOP ---

I am group "A"

 

[latexman]

I will start my fers pension in 3.5 years at about 57 y.o. But will have no cola until 62 ad then it is a "diet cola"
(If the increase in the Consumer Price Index that is used to compute the COLA is 2% or less, the COLA is equal to the CPI increase. If the CPI increase is more than 2% but no more than 3%, the COLA is 2%. If the CPI increase is more than 3%, the adjustment is 1% less than the CPI increase. )

Sounds like Bernicke's Reality Retirement Plan by design, right? Actually, it's (Bernicke's Reality Retirement Plan)^2, one spends less as one ages and slows down, X (times) the employer not providing a full COLA.

But, you are lucky, my megacorp pension is no COLA!

 

[Osprey]

Will you also be eligible to get the FERS social security supplement which is paid from retirement until you reach age 62? For me, setting aside money to replace the social security supplement until I decide to take social security is of greater concern that the inflation issue which I will deal with by drawing down from my TSP as needed.

 

[friar1610]

As a military retiree, I never used Tricare Prime in my pre-Medicare days because I didn’t want to deal with an HMO-type plan. I used Tricare Standard with a supplement from MOAA. Once I became Medicare-eligible I used it plus the free Tricare for Life (TFL) as the supplement. I have been completely satisfied. I have had virtually no out-of-pocket expenses except for the co-pays on the TFL drug plan (but that coverage is included in TFL).

 

[Bigdawg]

Thanks for all the replies! Haven't found the "diet cola" pension modeling yet. I do have a decent TSP account that I will be using to keep me from drawing SS until 70 (67 for spouse) and there should be enough to cover inflation but was just wondering if there was a rule of thumb that could neatly compensate for an ever decreasing value of a pension that is not indexed to inflation via a full cola.

On a different track somewhat but kinda tied to it is the idea that my FEHB premiums and Dental Premiums will come from my FERS pension and health care cost usually rise MUCH faster than inflation. SO the premiums will be taking a bigger and bigger chunk of the FERS pension and 15 years or so down the road it could look like a paltry amount that actually gets paid to my checking account after the premiums are taken out. So I was wondering if it would be too risky to at 65 years old just use Medicare and Tricare (suspend FEHB) which I should qualify for (retired Guard) at 60 years old?

You seem to have mutiple streams of income. FERS in a few years with COLA (lite), Guard pension at age 60 which is full COLA, SS at 62-70 which is COLA. You have TSP which hopefully has some equities (C fund) component to it. Medicare at 65 so no need for FEHB. I think that you are sitting pretty. If your TSP return is a % or 2 above CPI every year on average you will be ahead of the game. Good luck and thanks for your service.

 

[militaryman]

Will you also be eligible to get the FERS social security supplement which is paid from retirement until you reach age 62? For me, setting aside money to replace the social security supplement until I decide to take social security is of greater concern that the inflation issue which I will deal with by drawing down from my TSP as needed.

Yes, I will collect the FERS "SS" Supplement and then use more of my TSP balance to maintain a budget of $85K per year which is approx. $15K above what I spend now while working (after adjusting for no retirement contributions and SS/Medicare tax)

 

[ExFlyBoy5]

Thanks, I am hoping that is right --- Just didn't know if for some reason you need to choose an "out of TRICARE network" specialist for a procedure (that FEHB would cover if you had as backup) if that would come into play. Like whether any provider out of network counts towards the $3,000 max OOP ---

I am group "A"

That I am not sure of. I can tell you that my wife has had two spinal surgeries done out of network (provider and hospital) and about 1,000 miles from home and getting Tricare to cover them was not difficult at all which was somewhat surprising to me. Her surgery was complex and the "go to" surgeon where we live wouldn't touch her with a 10 foot pole so I have to assume that medical necessity requirement was easily met. I have also known Tricare Prime beneficiaries that have gotten cancer treatments out of network and those were also done at "in network" prices and was easily arranged. Nonetheless, I *think* that if you do out of network without a referral/approval, you are subject to paying more than the OOP max.

 

[Nords]

OP
There is a long time member and former moderator here, Nords, who has written much about military retirement/benefits/etc.
Look under FAQs or look him up and try to pm him.
I am not military, but have learned much from his posts in the past.

Thanks, Pacergal!

So I was wondering if it would be too risky to at 65 years old just use Medicare and Tricare (suspend FEHB) which I should qualify for (retired Guard) at 60 years old?

Also what about from age 60-65? Anyone in my boat (Retired reserves/Guard and Federal Retiree also) use Tricare Prime and a very low cost FEHB premium plan as a backup? OR Tricare alone?

As a military retiree, I never used Tricare Prime in my pre-Medicare days because I didn’t want to deal with an HMO-type plan. I used Tricare Standard with a supplement from MOAA. Once I became Medicare-eligible I used it plus the free Tricare for Life (TFL) as the supplement. I have been completely satisfied. I have had virtually no out-of-pocket expenses except for the co-pays on the TFL drug plan (but that coverage is included in TFL).

Militaryman, what Friar1610 says.

I can’t conceive of a physical or medical condition that would be “out of network” for Tricare Select. As long as the doctor (or hospital) takes Tricare then you’re covered. You’d pay the new $25/month premium for the coverage. You’d pay a 20%-25% cost share for the treatment, and that has a $3000/year catastrophic cap.
https://tricare.mil/select

At your current age (Reservist in retired awaiting pay status) you could use Tricare Retired Reserve insurance up to age 60. The premiums aren’t subsidized by DoD so it might be more expensive than FEHB.

At age 60 you’d go on Tricare Select.

At age 65 you’d sign up for Medicare and go on Tricare For Life (which currently has no enrollment fee). TFL is supplemental Medicare insurance, and again it’s probably at least as good as FEHB.

Thanks for all the replies! Haven't found the "diet cola" pension modeling yet. I do have a decent TSP account that I will be using to keep me from drawing SS until 70 (67 for spouse) and there should be enough to cover inflation but was just wondering if there was a rule of thumb that could neatly compensate for an ever decreasing value of a pension that is not indexed to inflation via a full cola.

You might be overthinking this. You’ll receive two other inflation-adjusted streams of income in addition to the FERS pension (and perhaps VA disability compensation?). The decline of purchasing power in your total pension/compensation income might be a rounding error against your actual spending.

You could read Grumpus Maximus’ blog to see if there are any thumbrules for diet-COLA pensions (I don’t remember seeing one) or contact him through there.
https://grumpusmaximus.com/what-is-a-golden-albatross/

The more significant effect on your actual expenses might be the “retirement spending smile.” During your first or second decade of retirement, your spending is probably going to decline faster than inflation erodes your income A little later your military pension and Social Security will help your annual income keep up with inflation, and you’ll have more assets than you need to fill in any gaps.

 

[slowwalker]

Thanks, I am hoping that is right --- Just didn't know if for some reason you need to choose an "out of TRICARE network" specialist for a procedure (that FEHB would cover if you had as backup) if that would come into play. Like whether any provider out of network counts towards the $3,000 max OOP ---

I am group "A"

I wouldn't worry about out of network costs with Tricare-Prime. DH had over 100K in medicals for cancer treatment with an out of network provider and our out of pocket costs were minimal. Didn't even come close to the 3K max. That was 10 years ago and since going on Medicare, Tricare-for-life pays the copay for all medicare approved procedures. As you may know, Medicare does not pay for eye exams or dental but that is minimal and knowing that we will never get hit for big medicals like my parents did takes a lot of worry out of our retirement planning. I love Tricare!

 

[militaryman]

This is great to hear from folks who have actually been modeling what I am thinking of doing. Saving a few hundred a month on health care premiums and still getting good coverage is an exciting thought. Hopefully everything will be the same in a few years when I qualify to retire.

 

[Koolau]

This is great to hear from folks who have actually been modeling what I am thinking of doing. Saving a few hundred a month on health care premiums and still getting good coverage is an exciting thought. Hopefully everything will be the same in a few years when I qualify to retire.

By the way, if we haven't said it - or even if we have, thanks for your service.

After 16 years of retirement and three dramatic changes in my healthcare status. First, Megacorp changed how they supplement our retiree health care. When I retired, they actually "provided" a specialized health care plan (shared expense between Megacorp and me.) Next, they gave us a chunk of money and helped us find health insurance to purchase - left over money was sort of like an HSA to be used only for co-pays, etc. THEN Medicare kicked in as well as the chunk of Megacorp cash.

My point - inflation or not, your expenses will be so lumpy, that a % here or there that you don't make up will not derail your retirement. Now, significant inflation not made up for could be a problem. I see us heading into those days. At my age, anything less than 5% probably won't hurt too much as my pension is maybe 25% (probably less) of my spend now.

Many here - me included - have noticed fairly dramatic lowering of cash burn as we age - not guaranteed, of course. If I'm making a point, I wouldn't concentrate on pension or even health care. Just figure your overall expenses and run FIRECalc or similar software with different inflation assumptions. You'll likely conclude you're golden - assuming inflation doesn't get 70's/80's style. If it does, NEW ways of coping begin to open up (ridiculous CD rates, bonds paying umpteen %, etc.) No way to know how any of us will actually fare. Just stay flexible and adaptive. If you struggle, all of us here will to an extent. By then, we'll all be advising each other how we're surviving.

Good luck and YMMV.