Inflation makes things you buy cost more. That dollar buys you less than it did before. Of course, if your income grows as fast as inflation, you won’t feel the pinch. Our active duty military and federal employees get yearly adjustments to your pay based on the Consumer Price Index (CPI) which is one way of measuring inflation. This really helps the buying power of your paycheck keep up with rising prices or inflation. However, most of our other listeners don’t receive automatic boosts to their pay check. Eventually pay often catches up, but you’ll feel that lag where your pay doesn’t buy what it used to.
Inflation can hit retirees especially hard. Traditional pensions from companies are often set when you retire, and remain the same amount the rest of your life. If you enjoy a long life, that set monthly payment will cover less and less of your daily needs as time goes on.
When military retire from active duty you continue to get yearly Cost of Living Adjustments (COLA). This is HUGE because most military retire in your 40s and 50s and odds are you will live another 40 years or more. You CSRS federal employees will also get yearly automatic COLA . Unfortunately, FERS employees get what I call diet-COLA. With diet COLA you get a full COLA for inflation up to 2%. When inflation for the year is between 2 and 3%, you COLA is fixed at lower 2%. For years where inflation is 3% or higher you receive the CPI minus 1%. So if inflation is 3.5% your COLA would be 2.5% that year. This isn’t horrible, but you will see a gradual erosion of your retirement pay buying power over time.
So what to do? Try to continue to increase you pay faster than inflation while you are still working. If you are covered under a pension, this will help you receive a higher pension when you retire. Higher pay will give you more opportunity to save and invest for retirement. Also invest your long-term savings in a way that will grow faster than inflation, increasing you future buying power. The G Fund which is an investment option available to military and federal employees in their Thrift Savings Plan, which is like a workplace 401k. The G fund is guaranteed not to lose money and is considered the “safest” place to invest your TSP dollars. Your 401k plan may have a similar short-term government bond option. But calling them safe doesn’t really tell the whole story. You won’t lose money, but it is not guaranteed to keep up with inflation And the power of those savings may not keep up with rising costs of what retirees spend on, especially healthcare and medicine.
Taking some calculated risk in hopes of being rewarded with more growth over time can help. That means investing at least some of you retirement funds in stocks and/or bonds issued by companies. These investments are more risky. Their value swings much higher, and lower than those “safe” investments. If you have to cash out when the market is down , you can lose money. But saving money in a well-diversified selection of investments can help smooth the roller coaster a little and in the long run has a higher probably of beating inflation and maintaining your buying power down the road.
Alright at the beginning of the podcast I mentioned that inflation can be both good and bad. If you have a long term loan, like a mortgage and there s inflation, the dollars you pay the loan back with in later years are worth less than the dollar in you pocket now. Your lender feels the inflation pinch instead of you. This can be a double benefit of refinancing your mortgage when interest rates are very low, like they are right now. Inflation is also very low right now. But with a fixed rate mortgage, the interest rate you pay on the loan will stay that low rate. But inflation is not fixed. If inflation raises during the life of your loan, which could be decades, you will be paying it back with cheaper dollars.
