Inflation and your retirement timeline

With inflation on the rise, a growing number of feds are crunching the numbers to weigh the financial benefits of working another year or two. For many, the answer is eye-popping: As in lots more money in retirement for working a couple of years longer.

Example:

According to benefits expert Tammy Flanagan, an employee under the Federal Employees Retirement System (FERS) making $80,000 per year could boost their starting annuity by almost $30,000 by sticking around another two years. That, by anybody’s standard, is a lot of money. Now and later. The vast majority of still-working civil servants are under the FERS plan. While it has a less generous civil service benefit than the Civil Service Retirement System (CSRS) program it succeeded, FERS workers get Social Security credit and also qualify for a 5% government match to their Thrift Savings Plan accounts. Because it has more moving parts and different rules, retiring under the FERS program can be trickier. But worth it, if done correctly. Working longer for a larger annuity means many FERS retirees can delay tapping into their TSP accounts for years.

Maxing out on their retirement is especially important for FERS employees because, unlike their CSRS colleagues, FERS retirees are under a diet cost of living adjustment (COLA) program. Bottom line, when inflation exceeds 2% (as it will this year) retirees get an inflation catchup that is 1% less than the actual rise in inflation. For example, the January 2022 COLA for CSRS, Social Security and Military retirees is 6%. Those under the FERS program will get only 5%. Over time the compounding-in-reverse means dramatically less purchasing power.

So what — other than the obvious — is the downside to working longer than you planned? Earlier this year Tammy Flanagan tackled the work-till-you-drop issue on our Your Turn radio show. So what’s the catch?

She points out that by working two more years, from age 60 to age 62, the $80,000 per year employee can boost their starting annuity by almost $30,000 — all the while drawing full salary, qualifying for pay raises and within grade raises, and boosting their high-3 year average salary.

Interested?

After we did the show, Tammy came up with this example of how delaying retirement can benefit you. A lot. Of course there are many other factors to consider. But money, as in having enough in your Golden Years, is a very big reason. You can adapt this example of an $80K employees extending work longer to get more in retirement. Here’s her example:

  • Length of Service at age 60: 19 years
    • 19 x $80,000 x 1% = $15,200 x .90 = $13,680 (10% reduction under the MRA + 10 retirement because employee didn’t have 20 years of service at age 60 to qualify for an unreduced retirement)
  • Length of Service at age 61: 20 years
    • 20 x $80,000 x 1% = $16,000 + $12,000 = $28,000 (The extra $12,000 represents a FERS supplement of $1,000 a month payable to age 62 when retiree could file for SSA and get an even larger SSA benefit based on their lifetime of FICA taxed wages)
  • Length of Service at age 62: 21 years
    • 21 x $80,000 x 1.1% = $18,400 + $24,000 = $42,480 (The $24,000 represents the SSA benefit payable at age 62 of $2,000 a month from their lifetime of FICA taxed wages)

Of course the person who left at age 60 could claim their SSA benefit, but the gap would still be close to $5,000 a year or $600 a month in their FERS basic retirement benefit — for life! They would have benefited from two more years at their presumably highest earning years added to their SSA record, and two more years of contributions and growth to their TSP account.

They could withdraw $24,000 a year from their TSP account so that they could receive $43,000 a year by delaying claiming SSA to age 70, and then take much smaller payments from the TSP so that they will satisfy the required minimum distributions at age 72.

Definitely worth putting in your retirement planning kit. And passing on to a FERS friend. Meantime, listen to today’s Your Turn episode at 10 a.m. EDT streaming here or on the radio at 1500 AM in the Washington D.C. area.

Tammy is now “in retirement,” which in her case means working full-time as a retirement consultant. She can be reached at Tammy@retirefederal.com.

Nearly Useless Factoid

By Alazar Moges

The Caesar salad is named after the Italian chef who invented the dish, not Julius Caesar of the Roman Empire as many believe. Chef Caesar Cardini, an Italian immigrant, took his culinary journey from Italy to Canada, then on to the U.S., and then later on to Mexico to avoid prohibition, where he created the improvised salad in Tijuana in 1924.

Source: BBC

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THRIFT SAVINGS PLAN TICKER

Sep 16, 2021 Close Change YTD*
L Income 23.2492 -0.0094 4.43%
L 2025 12.0658 -0.0087 8.33%
L 2030 42.7474 -0.0399 10.54%
L 2035 12.8596 -0.0131 11.50%
L 2040 48.7414 -0.0535 12.46%
L 2045 13.3719 -0.0155 13.28%
L 2050 29.3347 -0.0357 14.12%
L 2055 14.4724 -0.019 17.18%
L 2060 14.4724 -0.0191 17.18%
L 2065 14.4725 -0.019 17.18%
G Fund 16.6638 0.0007 0.88%
F Fund 21.0964 -0.0376 -0.55%
C Fund 67.2804 -0.102 21.56%
S Fund 85.1655 0.1991 16.31%
I Fund 39.7475 -0.1041 11.70%
Closing price updated at approx 6pm ET each business day. More at tsp.gov
* YTD data is updated on the last day of the month.