Being in debt, especially heavily in debt, while working is a bad idea. Yet lots of people do it and survive.
But being heavily in debt when you retire means the so-called “Golden Years” will be anything but. Especially if you are under the Federal Employee Retirement System (FERS) program with its diet cost of living adjustment (COLA) formula.
Inflation has been low-to-normal for the past few years. But many experts think that’s about to change for a variety of reasons. The last COLA federal retirees (both in FERS and the civil service retirement system(CSRS ) got was 1.3%. But many projections say that when the final numbers are in (for the months of July, August and September) the January 2022 COLA for CSRS retirees (and Social Security) could be 5% or 6%.
If it is, that means the FERS COLA (on an already smaller annuity) will be 4% or 5%. Not the full inflation-catchup retirees want to avoid slipping dangerously in purchasing power.
Over time, the value of their annuities can slip tens of thousands of dollars below their actual expenditures. Arthur Stein, a well known DC-area financial planner, said the diet-COLA feature of feds means they must have other income — from Social Security, their TSP accounts or some other source — to maintain their standard-of-living in retirement. He pointed out that the Consumer Price Index (CPI-W), which measures inflation, is almost always higher each year.
“There were only four years since 1945 when the CPI declined,” he said. “The cost of living more than doubled what it was in 1988.”
And each year that the COLA for federal retirees was higher than 2%, FERS retires got only the diet COLA portion of it.
One way to make retirement as comfortable as possible is to begin it debt free. We asked active fed and part-time financial coach Abraham Grungold how to avoid a debt-hobbled retirement. Here’s what he said:
Retirement with Debt is a Bad Idea
Imagine this: you are within five years of your federal retirement, and you have a considerable amount of debt from credit cards, mortgage debt and your child’s student loans. How will your retirement be successful?
Unfortunately, it is a bad idea to enter retirement with considerable debt. As you reach retirement, you will be hit with new expenses such as medical bills or purchases to spoil your grandchildren. You may want to buy a vacation home or a sailboat. Thus, to prepare for retirement, you must reduce your debt.
It is never too late to alter your spending habits. Instead of grabbing that Starbucks coffee, make a cup at home and take it with you. During the pandemic, I saved a lot of money by working from home, preparing my meals and reducing frivolous spending. While my family did do a lot of online purchasing and food deliveries, we saved thousands. Yes, thousands! Therefore, you can do it too.
First, aim on reducing your credit card debt and mortgage debt. This can be done by living on a budget. A budget will help you to limit your spending in non-essential categories such as vacations, high-end brand clothes and streaming services. For example, when you go to a store, ask yourself, “Why am I really purchasing item X, and do I really need it?”
I would go to stores like Macy’s and Target, always feeling like I had to leave with a shirt or a pair of shoes. This is impulse buying, and while it makes you feel good, you end up with a closet full of shirts, shoes and designer bags that you do not truly need.
To reduce your mortgage debt, you should aim to make extra payments or look into possible options for downsizing your home. If you will be an empty nester in retirement, decide how many bedrooms you need rather than want. A smaller home could eliminate your mortgage and significantly reduce your monthly living expenses such as utilities, insurance, and taxes. Additionally, switching from your home in New York City to a property in Florida could put a lot of equity in your pocket.
As a financial coach, many federal employees contact me regarding their retirement. They ask me to help them figure out when is the best time for them to retire and what steps they need to take to retire successfully. While they discuss their goals, I perform all their calculations and discuss their credit card debt, loans, and mortgages. We plan how will they spend their time in retirement and how their retirement activities will be funded. While retirement is different for everyone, there are simple steps you can take today to set your future on the right track.
Financial success can easily be achieved; it only takes a little effort.
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