Pay raise or retiree COLA, what’s the best deal for you?

So where are you career-wise in federal service? Newcomer, mid-career, retirement eligible? For purposes of navigation, consider the stats: The youngest still-on-the-job federal employee under the old Civil Service Retirement System is 49 years old!

The youngest fed under the newer Federal Employees Retirement System is in his/her teens.

About 4% of all active feds are under CSRS (roughly 108,000 people) while 96%, or about 2.5 million, will retire under the FERS program if they retire from government. Only about 39% are under age 40. That means some may be working for the next 30, 40 or 50 years.

Some federal-postal workers quickly catch-on to their pay and benefits package. Many of them tend to be lifers, which tells you something. Others don’t learn about — or invest in — the TSP for months. Sometimes years. A few FERS employees miss out on the eye-popping (to many private sector workers) information that Uncle Sam will match up to 5% of their contributions to stock, bond or government funds. A nest egg that could supply as much as 30% of their spending money in retirement. That 5% extra is a big deal. Especially if you don’t take it.

When it comes to retirement planning, many feds don’t understand about annual pay raises they (usually) get, and annual cost of living adjustments they usually get. While they can be similar, they are totally different critters. Now maybe more than ever.

Pay raises are purely political and fiscal decisions. Made by politicians (who also get the raises). Retiree COLAs are based on official cost of living data collected and provided by the Bureau of Labor Statistics.

This year, January 2022, the raise was 2.2% with another 0.5% for locality pay. That is one of the biggest in years. The January COLA was 5.9% for CSRS retirees and 4.9% for FERS retirees, an important fact if you have or will retire under FERS. In short-hand that “diet COLA” feature means that, over time in retirement, you will have less and less to spend. Especially in times of high inflation, like now! That in turn means you will need the maximum FERS annuity and the maximum investment in the TSP (and in the right funds) to be sure your retirement income is maxed out. In 2020 the pay raise was 3.1% while the COLA was 1.6%, reflecting low inflation. Health premiums for both active and retired workers went up an average of 5.6% that year. But things are changing. Inflation is higher than it’s been in decades. Some believe this is the new normal. If that’s true, current workers who are at or near retirement eligibility may have to decide whether they are better off retiring (to get higher COLAs) or hanging on in hopes politicians will see to it their pay keeps pace with the rising costs of just about everything!

Nearly Useless Factoid

By David Thornton

Source: American Psychological Association

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