Are Your FERS, TSP, and Social Security Accounts Indexed for Inflation?

There are multiple factors to consider when saving for your federal retirement. You want to enjoy your life now, but you also need to make sure you have enough saved once you leave public service. Once you’re finally ready to retire, you have to consider what to withdraw, when to pull your funds, and how much you need from the Federal Employees Retirement System or FERS.

Even the best savers and planners can get tripped up by minor technicalities or miscellaneous factors. One of the factors that many people forget about is inflation.

The value of your retirement today won’t be as strong next year, 10 years from now, or 30 years from now. The best savers will account for inflation when they save and when they start to pull from their savings accounts.

Which Accounts Are Indexed for Inflation?

If you have invested in various retirement plans throughout your working career, but haven’t once considered inflation, there is good news. FEDweek reports that two out of the main three retirement systems account for inflation: FERS and Social Security.

“Social Security has a full inflation adjustment and FERS has a modified inflation adjustment,” they write. “The Thrift Savings Plan, however, is not indexed for inflation.” This means that your FERS and Social Security payments will match whatever the value of your funds are in the years when you’re retiring.

In 2015, the average monthly social security check was $1,335. In 2018, the average monthly social security check will be $1,404. You can see that in just a few years, inflation has forced elected officials to increase the average check to account for the cost of living burden on most retirees.

How Can You Adjust Your TSP Payments for Inflation?

Because your TSP withdrawals do not account for inflation, it’s up to you to adjust the payments on an annual basis. This means withdrawing enough to account for inflation — and saving enough while you’re still working.
Financial experts recommend using the 4% rule once you retire to account for inflation. Most people assume the 4% rule means you only withdraw 4% of your savings each year. However, this will reduce your purchasing power over time.

“You withdraw 4% of the total value of your nest egg the first year of retirement. Then you increase the dollar value of all subsequent annual withdrawals by the inflation rate to maintain your purchasing power.”

They use the example of a retiree that has $1 million saved. The first year they withdraw 4% (of $40,000), and then they account for inflation the next year. If experts estimate a 2% inflation rate, then they withdraw $40,800 the next year. This way, you withdraw more every year, but are able to maintain your standard of living and continue to cover your expenses.

Should Inflation Change Your FERS and TSP Investment?

While it helps retiring federal workers to know that their FERS account is covered and to learn how to withdraw from their TSP account, it often leaves people wondering if they need to invest more to account for inflation over the years.

After all, if you have $500,000 in your TSP account and withdraw $20,000 per year, your account would last 25 years (or when you reach 90 when you retire at 65). It won’t last that long if you withdraw more than you planned to account for inflation and may run out sometime in your 80’s.

There are two factors to consider with your federal retirement plan.

The first is that TSP accounts continue to perform better than inflation. In the article mentioned above, FEDweek reports that Thrift Savings Plan investments have outpaced inflation every year since they first started. This means that your savings will grow beyond inflation, and what you continue to put in will last you through retirement.

The second factor is in your control. Most retirement experts recommend investing a percentage of your income each year instead of submitting a flat rate. Instead of depositing $5,000 each year, deposit 10% of your paycheck.

Whenever you get a pay raise, put half of that extra income in your retirement. For example, if you get a 2% annual raise, put 1% toward your retirement. When your paycheck increases, your retirement deposit will too.

These tips will help you continue to adjust your retirement investment to keep living within your means long after you retire.

TSP accounts continue to perform better than inflation. This means that your savings will grow beyond inflation, and what you continue to put in will last you through retirement.Click To Tweet

FERS, TSP, and Social Security Accounts: How MyFEDBenefits Can Help You Make the Most of Them

You don’t know what inflation will look like in the next 10 or 20 years, but you can save today to make sure you’re in the best position possible.

Start with a free consultation by an expert at MyFEDBenefits who is local and understands your needs. We can help you maximize your benefits and prepare for federal retirement, so you can confidently navigate uncertain economic times in the future. Contact us today so we can help you save for the future.