Inflation, debt, retirement: A bad mix

In case you hadn’t noticed, inflation is at a 20 year high. Gasoline prices have jumped 40%. Houses are up 30% in many spots. A new car costs an average of $40,000-plus. And this may be the new normal, according to some experts. That’s the not-so-good news.

The much better news is that lifetime annuity benefits of most current federal/postal workers are relatively inflation proof. Just like Social Security. Or military retired pay. But during periods of high inflation — like NOW — keeping up with inflation that exceeds 2% per year will be almost impossible. Civil Service Retirement System (CSRS) retirees will be getting a 5.9% cost of living adjustment (COLA) in January. But those who retired under the Federal Employees Retirement System (FERS) will get a diet COLA of 4.9%. You don’t need to be a math whiz to see that overtime, if inflation is high, FERS retirees will fall further and further behind. So while most current retirees are in good shape, with a lifetime COLA linked to inflation, most current workers, people on the payroll now who are under FERS, need to plan carefully for periods of extended inflation which they will have to survive on diet COLAs.

So when you say most current retirees are protected from inflation, the key word is “most.” Most meaning the majority of people who retired from government years ago. And if they retired under the old Civil Service Retirement System. CSRS guaranteed qualified workers with a generous (by private sector standards) annuity for life. And one that was linked to inflation. The yardstick Uncle Sam uses to measure living costs is the Consumer Price Index-W (CPI-W). Many retirees say the CPI doesn’t reflect the costs that go with getting older. They would prefer an index that takes into account things like medical bills and drugs. But while it isn’t perfect, the COLA catchup under CSRS is better than almost anything outside government. Same for most people working right now who are under the different/less generous FERS program.

Most current federal and postal retirees are relatively inflation proof. Most current workers under the FERS program will not be when they retire. Which means they shouldn’t carry any large debt into retirement.

While future FERS retirees can’t do anything about inflation by themselves, they might support the National Active and Retired Federal Employees, which is lobbying Congress for what they say is a more accurate COLA catchup system for FERS retirees. They can also help themselves, big time, if they can pay down or pay off existing debts before they retire.

Over time, the value of annuities can slip tens of thousands of dollars below expenditures, according to Arthur Stein, a well known D.C. area financial planner. He says the diet COLA feature of FERS 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 points out that the Consumer Price Index is almost always higher each year. “There were only four years since 1945 when the CPI declined,” he said. “The cost of living I got more than doubled what it was in 1988.”

One way to make retirement as comfortable as possible is to begin it debt free. So we turned to a successful pro. Abraham Grungold, a recently retired fed, is now a full time financial coach. His motto, at least one of them, is “retirement with debt is a bad idea!” Here’s how explains it:

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 they will 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.

Any questions or comments please contact me at Abraham Grungold – AG Financial Services or my Facebook page at FERS Federal Employees.

Nearly Useless Factoid

By Alazar Moges

You weigh less at the equator than you do at the north pole. The attractive force of gravity is slightly reduced because it is directed towards the center of the Earth. If you weighed 100 pounds at the north pole, at the equator you would weigh 99.65 pounds, 5.5 ounces less.

Source: NASA

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THRIFT SAVINGS PLAN TICKER

Jan 24, 2022 Close Change YTD*
L Income 23.0998 -0.004 5.42%
L 2025 11.8788 -0.0041 9.75%
L 2030 41.7457 -0.0202 12.37%
L 2035 12.5177 -0.0065 13.43%
L 2040 47.2981 -0.0258 14.51%
L 2045 12.9364 -0.007 15.40%
L 2050 28.3038 -0.0157 16.34%
L 2055 13.8741 -0.008 19.90%
L 2060 13.8738 -0.0081 19.90%
L 2065 13.8737 -0.0081 19.90%
G Fund 16.7539 0.0022 1.38%
F Fund 20.5114 -0.0212 -1.46%
C Fund 66.6178 0.185 28.68%
S Fund 74.2811 1.2775 12.45%
I Fund 37.7682 -0.4925 11.45%
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.