Inflation: The retirees’ biggest enemy

Many, if not most, career federal and postal workers will retire with a decent annuity, indexed to inflation. In many respects, it will be superior to what their private sector counterparts get or will get. Few, if any, non-governmental employers still offer pensions. And those who do don’t provide any inflation protection. Feds by contrast have some or almost total protection. Those under the old Civil Service Retirement System (CSRS) get a cost of living adjustment (COLA) each January based on the rise in living costs as determined by the Bureau of Labor Statistics. Many feds believe using the CPI-W short changes retirees because it doesn’t take into account increases in medical costs. Workers retiring under the newer Federal Employee Retirement System (FERS) are under 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 a problem.

Over an extended period of retirement — 20, 30 or 40 years — inflation can and will go up. A lot! Even with inflation “protection.” And that, overtime, can eat into the purchasing power of your annuity. We’ve been in a period of low inflation for some time. But many experts expect that to change as more stores open up, more people resume pleasure traveling and rush hour returns. Some are predicting $4-to-5 per gallon gasoline is in our not too different future. If you’ve been retired, you know what inflation can do. If you are planning on retiring later, you should figure it out.

Tammy Flanagan is an expert on the CSRS and FERS programs and she’s our guest on today’s episode of Your Turn at 10 a.m. EST. You can listen here or on the radio in the D.C area at 1500 AM. She recently got an email from a fed named Bill. He is concerned about inflation and says it is important for Congress to act on a proposal from the National Active and Retired Federal Employees that all retired feds get COLAs that actually reflect the true cost of inflation each year. To illustrate the ups and downs of inflation, Tammy cited this official government inflation tracker with the explanation, “I think that this chart says it all about 2020.”

We’ll also be talking about the 7 deadly sins you should avoid in planning your retirement. They are:

• Expecting OPM and HR to plan your retirement / Know when and who to ask for help when planning your retirement!
  • OPM doesn’t give advice, but they administer your retirement and insurance after your retirement is effective (not while you are an employee)
  • HR offices don’t (shouldn’t) provide advice, but their job is to provide you with education and information about your federal retirement benefits so that you can make informed elections. Some HR offices are staffed with experienced, knowledgeable, and helpful personnel and some are not.
  • The TSP website and the Thriftline are designed to provide education and information about the TSP however, they are also not in the business of providing financial planning or tax advice.
  • The Social Security Administration provides assistance with claiming benefits and understanding your entitlement to the various benefits for workers and eligible family members. They also are not in the business of providing financial planning advice.
  • You may need help from other professionals when you are ready to make important and sometimes irrevocable retirement decisions:
    • Federal benefits subject matter expert if not available at your agency
    • Financial Advisor
    • Tax Advisor
    • Estate Planning Attorney
  • Disregarding tax consequences and not taking advantage of tax strategies.
    • Could You Be Paying Too Much in Taxes in Retirement?
    • Tax Planning for and during retirement is the second most overlooked area in developing a financial plan for Federal Employees.
    • Many federal employees assume that their taxes are going to be lower in retirement.
    • Most Feds put the majority of their retirement savings in tax-deferred accounts, like the TSP or Individual Retirement Arrangements (IRA).
    • Learn how much of your retirement income will be subject to federal (and state, if applicable) income taxes.
    • The IRS has a calculator to help you estimate your federal income tax and information for retirees.
  • Ignoring the differences between your “Leave” Service Computation Date and your “Retirement” Service Computation Date.
    • Service that counts for leave accrual is not always credited for retirement eligibility and computation.
    • Military service is credited generally only if deposit is paid.
    • Changes in work schedule can impact retirement eligibility and computation.
    • Your retirement service computation date is often not computed until you file your retirement application; learn how to have this done earlier.
    • Employees who were hired between 1984 and 1987 as well as those who returned to federal service after 1983 after a break in federal service are among those who may have an error in their retirement coverage.
    • Learn what you can do to be sure your service is creditable and adequately documented.
  • Misjudging the timing and processing of your retirement claim
    • Allow enough time for your HR and Payroll office to do their part of your retirement processing.
    • The transition from employee to annuitant involves a paper-based processing system that can take months for adjudication.
    • Botching the CSRS or FERS retirement application by using white out, cross outs, or not answering all of the questions.
    • Learning the best order to turn on your retirement benefits. FERS is a 3-tiered retirement system: government pension, Social Security and Thrift Savings Plan. You don’t have to turn on all three benefits at the same time.
  • Ignoring the need to have a long-term care plan 
    • What is the best time to plan for the future needs of long term care?
    • Does everyone need long term care insurance?
    • What does it mean to be self insured?
  • Neglecting to Plan for the inevitable
    • Erring when planning for a current spouse’s financial security.
    • Underestimating the value of the spousal survivor benefit election, if married.
    • Failing to understand the court order requirements for a former spouse.
    • Forget to keep beneficiary designations updated.
    • Overlook the standard order of precedence as an option instead of designating named beneficiaries.
    • Having too much or not enough life insurance.
    • Canceling basic life insurance is not a great idea.
    • You may be paying too much for life insurance.
  • Failing to take advantage of annual open seasons to change health plans to meet your changing needs
    • You may be in the wrong health plan if you are over age 65.
    • Retirement can last a long time, learn how Medicare works with your FEHB plan.
    • What health plans work for families with different needs for healthcare.
    • A high deductible health plan can save you money if you understand how to make the most of a health savings account.

Nearly Useless Factoid

Bats are the only flying mammal. While the flying squirrel can only glide for short distances, bats are true fliers. A bat’s wing resembles a modified human hand — imagine the skin between your fingers larger, thinner and stretched. This flexible skin membrane that extends between each long finger bone and many movable joints make bats agile fliers.

Source: Interior Department

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