Defining inflation is simple—it’s when everything becomes more expensive. The reason it happens and how it’s measured, however, is complicated.
For many retirees, it begs the question, “Does inflation affect my retirement?” Put simply, the answer is yes. In the end, when inflation is high, you have less buying power. And when you are heading into retirement, the last thing you want is less buying power when you are about to have a fixed income.
How does inflation affect your retirement?
Inflation can affect your retirement overall by devaluing what you have saved. For example, if you have planned to need $50,000 a year in retirement to live comfortably—in 20 years, with just 3% inflation yearly, that $50,000 is only valued at $27,685 in today’s dollars. That is shocking.
Unfortunately, inflation has an effect on more than just your savings. Here are three areas of concern:
- Cost of Living Adjustments
- Social Security
- TSP and other investments
COLA and Your FERS/CSRS Retirement Pay
For retirees, who receive a CSRS or FERS pension, their pension will change over time based on specific economic conditions. This increase is called a cost-of-living adjustment (COLA).
Each year, the Bureau of Labor Statistics releases a number called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The Bureau of Labor Statistics has set a “basket of consumer goods,” meaning all the different goods the average consumer purchases. They watch the cost of these goods over time and that determines how much the economy has changed.
The CPI-W, takes this number that the Bureau of Labor Statistics releases and uses it to determine the change in a federal retiree’s pension check. Sometimes the rate is zero, as in 2016, when there was no adjustment in COLA. Other times it’s high, as in 2023, for FERS employees COLA was 7.7 %. But that still did not keep up with inflation from the previous year.¹
Social Security
Social Security, like the CSRS and FERS pension, experiences cost-of-living-adjustments as well. They use the calculations from the Bureau of Labor Statistics, in much the same way but not always with the same outcomes. Similarly, in the past decade the Social Security COLA adjustments have not kept pace with inflation. For example, in 2023, inflation was at 4.1%, but Social Security COLA was 3.4%.¹ This leaves “pensionnaires,” year after year, with less buying power.
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TSP and Other Investments
If the growth of investments does not offset inflation, then the investment is not doing what it is supposed to do. And that is to generate a profit and increase in value over time.
If you want to make sure your TSP is running optimally, watch this informative webinar, Optimizing Your TSP.
What Should You Do?
Don’t panic and don’t make any rash moves without speaking to a financial professional. Work with them to manage your financial portfolio and navigate through the highs and the lows. Together you will see that through proper planning and with a cool head you will have the retirement you have always dreamed of.
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