Retirement Planning Retirement PlanningRetirement Planning
Advice on how to prepare for life after government.


One of the very nice things about federal retirement benefits is that they come with annual cost-of-living adjustments.

For many people, retirement means living on a fixed income. They no longer get pay raises, promotions, overtime pay, locality pay or bonuses. Retirement income often is a fixed percentage of salary. There is some flexibility in the way people manage their retirement investments, but let's face it, most of us aren't going to be adding much to those savings, so they are in essence fixed, too.

Most people are satisfied if they can maintain their lifestyle in retirement. One of the things that can derail that goal is inflation.

Inflation's Effects

Here are some prices from 1980:

  • Postage stamp: 15 cents
  • Loaf of bread: 48 cents
  • Gallon of milk: $1.60
  • Gallon of gas: $1.03
  • Average new car: $7,600
  • Average house: $86,159
Now compare the same prices today:
  • Postage stamp: 39 cents
  • Loaf of bread: $1.48
  • Gallon of milk: $3.49
  • Gallon of gas: $2.50-$3.50, depending on the day
  • Average new car: $27,800
  • Average house: $264,000
Consider the case of Stella, who retired in 1979. After a 35-year career in government, her Civil Service Retirement System retirement benefit was $20,000 per year. Since then, Stella's retirement benefit has been adjusted by the following COLAs:
1980: 14.3%
1981: 11.2%
1982: 7.4%
1983: 3.5%
1984: 3.5%
1985: 3.1%
1986: 1.3%
1987: 4.2%
1988: 4.0%
1989: 4.7%
1990: 5.4%
1991: 3.7%
1992: 3.0%
1993: 2.6%
1994: 2.8%
1995: 2.6%
1996: 2.9%
1997: 2.1%
1998: 1.3%
1999: 2.5%
2000: 3.5%
2001: 2.6%
2002: 1.4%
2003: 2.1%
2004: 2.7%
2005: 4.1%
Those early 1980s were some high inflation years! Stella's retirement is now $54,134 per year, more than 2.5 times its original amount. But the prices of the things Stella needs to buy have gone up at the same rate.

If Stella had retired under the Federal Employees Retirement System at age 62, she would have received lesser annual COLAs and her retirement would have increased to only $45,150. Unlike CSRS annuitants, FERS retirees get Social Security benefits that are indexed to inflation. To compensate for the "diet COLA" of FERS, Stella would need to take a little more out of her retirement savings as she gets older.

A Tale of Two COLAs

Let's look at the difference between the regular and diet COLAs.

CSRS annuitants receive allowances based on the rise in the consumer price index for urban wage earners and clerical workers from the third quarter of one year to the third quarter of the next. FERS uses a somewhat more complicated formula to provide its smaller benefit. If the change in the CPI is between 2 percent and 3 percent, the FERS COLA is 2 percent. If the CPI increase is more than 3 percent, the FERS COLA is 1 percent less than the increase. COLAs under FERS are not provided until age 62, except under special circumstances.

The FERS basic annuity benefit is designed to be more like a private sector pension, providing a supplement to Social Security. Private sector pensions rarely receive any COLA adjustments. Social Security benefits receive the same adjustment annually as CSRS benefits.

Unlike FERS, CSRS was designed to provide full retirement benefits and not serve as a supplement to Social Security. CSRS employees are exempt from paying Social Security taxes during their federal careers. The lower FERS COLA seems to have been a compromise between the lack of COLAs in private sector pensions and the full COLA of CSRS benefits.

What You Get and When

The COLA is granted to retirees on Dec. 1 each year and is payable on Jan. 1. To get the full 2006 COLA on January 1, 2007, a retiree must have begun receiving benefits no later than Dec. 31, 2005. If not, the increase is prorated (under both CSRS and FERS). Annuitants with prorated accounts receive one-twelfth of the increase for each month they received benefits.

If an employee retires voluntarily, his or her retirement begins the first day of the month following retirement. Under CSRS, an employee may retire on the first, second or third day of the month and retirement officially will begin the next day. So, in order to have a retirement that began before Dec. 31, 2005, you would have had to voluntarily retire no later than Nov. 30, 2005, under FERS or by Dec. 3, 2005, under CSRS. There are exceptions for survivor annuities, disability retirements and involuntary separations.

Let's look at a couple of examples of how retirement dates affect COLAs:

  • Barney retired on Dec. 31, 2005. His retirement began on Jan. 1, 2006. He will receive eleven-twelfths of the COLA for 2006 on Jan. 1, 2007.
  • Lucy plans to retire under FERS at age 62 on Friday, Sept. 15, 2006. Her retirement will begin on Oct. 1, 2006. When the 2006 COLA is granted on Dec. 1, she will be entitled to 2/12 of it since she was a retiree for October and November.
For FERS annuitants who are not eligible to receive a COLA during their first year (or more) of retirement because they retired more than one year prior to age 62, the initial allowance they receive after reaching age 62 will be the full COLA. Some retirees under FERS receive immediate COLAs prior to age 62. These include employees retiring under the law enforcement, firefighter, and air traffic controller provisions of FERS. Survivor annuities under FERS also receive immediate COLAs.

So what will next year's COLA be? We will have to wait a few more weeks to find out. The 2006 COLA will be announced after Sept. 30 by the Bureau of Labor Statistics. If I were a betting person, I would wager that it will exceed the federal employee pay raise in January, whether that raise is 2.2 percent or 2.7 percent.


Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

Tammy Flanagan has spent 30 years helping federal employees take charge of their retirement by understanding their benefits. She runs her own consulting business at and provides individual counseling as well as online training for the National Active and Retired Federal Employees Association, Plan Your Federal Retirement as well as the Federal Long Term Care insurance Program. She also serves as the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Federal News Radio on Mondays at 10 a.m. ET on WFED AM 1500 in the Washington-metro area. Archived shows are available on

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