Micah Shilanski (00:00)
Welcome back to the Plan Your Federal Retirement podcast. I’m your co-host, Micah Shilanski And today we’re gonna talk about the mirage, the money mirage, the coal mirage, the thing that can potentially decrease your spending power, dare I say, rob you of future money if you are not planning for it correctly. And especially these last couple of years, we have seen this firsthand with our clients preparing to retire and our retirees. And we wanna share with you some important things, not only how this works, but how you can avoid it. And so we’re first gonna go through

concept that we’re talking about how this is going to work, how it’s affecting federal employees who are working, how it’s affecting retirees. The end of the podcast, we’re going to get into some action items of what you can do to better prepare yourself for inflation no matter how it’s going to come. So with that, I’ve invited back on the podcast, Luke, who’s an advisor inside of our office. Luke’s been an advisor for many years. He’s joined our team this last year and he brings a wealth of knowledge to the firm, which is fantastic. So Luke, thanks so much for joining us on the podcast.

Luke Eberly (00:57)
Yeah, happy to be here Micah.

Micah Shilanski (00:59)
So we were kind of pre-gaming and talking about this and inflation is something that you and I like financial advisors, right? We would talk about all the time, way more than the kind of the public sector does. Now the public is really interested in it because now they’re actually feeling inflation, right? Now it’s a real pain to them. So I think Luke, we kind of kicked this off with number one, let’s start with some definitions because especially when we talk about COLA, right? COLA means

different things depending on what type of cola we’re talking about, yet the word cola is used kind of interchangeably. So let’s talk a little bit about what cola is, then let’s talk a little bit of what inflation is, and then I’ll kind of back us into then how does this work for retirees and for workers and things that we need to be thinking about. What do think?

Luke Eberly (01:41)
Yeah, I think that’s a great idea. Having that base knowledge to really understand how does this impact you as a federal worker, as a retiree, as somebody thinking about retiring, how do these factors play in? So I love that idea. Let’s dive in.

Micah Shilanski (01:55)
Perfect. All right, I’m jump first on COLA and let’s talk about COLA and the unique aspect of COLA. For example, for people that live in Alaska or potentially some other areas, this is where COLA is different than locality pay, right? Locality pay is you as a federal worker get an adjustment in your income, whether it’s like the rough rate rest of the United States or you have a special locality rate based on what the cost of living difference is based on where you’re at versus the Washington DC and you get paid a little bit for that discrepancy.

Right? And so that’s a, the locality pay that you get is a taxable income. Then there’s COLA, which fewer and fewer places get, Alaska can still get some of it, depending on how you were set up. And you get a little bit of tax free pay that comes in. say, Hey, that where you live, costs a little bit more. So you might get locality pay as well as COLA. Alaska used to only get COLA, not locality pay. Then I’m pretty sure it was the non-foreign area equity retirement assurance act back around 2010 ish, which transformed look from COLA.

to locality pay. workers in Alaska and some other places, Hawaii, et cetera, would then get that money, which then counts towards your high three, which is why people like it so much. So sometimes when you’re talking about COLA, you’re talking about some tax-free pay that you would get. Luke, sometimes we use the other word COLA just to mean pay raises.

Luke Eberly (03:10)
Right, so COLA can mean, well, Cost of Living Adjustment, right? COLA is that acronym. So not only is it used when we’re talking to our federal clients, federal employees that are clients, talking about their pay raises, but also for a lot of people, when they hear COLA, they think of Social Security. They think of the COLA that’s applied to Social Security each year. Or as we know, our clients who are federal employees that are retired, they think of COLA when it comes to their FERS. ⁓

benefit and they get a cost of living adjustment with FERS. So these multiple different areas where this COLA comes into play. So it’s important to understand which one we’re talking about because they’re not all the same, Micah. They’re not all the same percentage. They’re different for each of those. I know you know that, but yeah, COLA, different for each what we’re talking about.

Micah Shilanski (04:03)
Yeah, right, so you have a COLA for working, have COLA for a little COLA versus locality, you have a COLA for a pay raise, you have a COLA for retirees, you have a COLA for FERS, you got a COLA for special provisions, you got a COLA for social security, those are all different. By the way, if you have a state retirement somewhere in there or a military retirement, that’s also gonna be different. So you have the same word and the subset definition of all of this can be really different. Now, why this plays into effect and what is COLA supposed to do, right? Like a cost of living adjustment, let’s take it from a retiree standpoint,

is that it’s supposed to help increase your pension, increase your retirement pay to keep up with inflation, right? To keep up with the cost of things going up over time. Now, this is where I get a little bit of my soapbox here, the difference in price increases versus inflation, right? We always kind of lump those up as the same definition, but I think there’s a little bit of separation here. This could be my soapbox because at end of the day, the only thing that matters is did things cost more or not? But the real definition of inflation, and Luke, push back, I’ll maybe have a different one, is

too much money chasing too few goods. the only one who can increase money legally into our system is the government. So inflation generally is caused by an increase of money into the system created by the government. any pushback on that?

Luke Eberly (05:20)
No, I think you’re spot on. mean, the government can do that multiple ways, right? They can decrease interest rates, right? That’s what the, when you hear about the federal reserve raising interest rates, decreasing interest rates, really what they’re doing is they’re increasing the supply of money out there or they’re decreasing the supply of money out there to help control inflation. So if they want to increase inflation, they decrease interest rates.

If they want to control inflation, they’re going to increase it. So that’s one big lever there.

Micah Shilanski (05:54)
Yeah, it’s a huge difference, right? I mean, the Fed moving a quarter point or a full point was something. Must take a home mortgage, right? From home mortgage from a 3 % to a 5 % mortgage, that’s a 2 % increase. But we’ve seen that even higher than that, right? Now all of sudden it makes it so much more expensive to someone to buy the home. So they’re going to slow the market down. They’re going to slow the economy down by making things more expensive. That’s kind of the Fed’s arm that they could do. The government can also, the Fed can also do this. The Fed can also increase how much banks can lend people money.

Well, in a way that’s gonna be increasing the money supply because if a bank’s gonna only lend X amount, now it’s X times two, they can lend twice as much money that’s out there. Well, now that’s more money giving in the system. It could be inflation by another program’s creator, the government spending more money on different things. Now, this isn’t a political podcast, right? So please don’t be taken at that angle about what’s good or bad. That’s irrelevant, right? Our job is to look at this and say it is what it is. How does this affect retirees? Luke, you and I like looking at this on the financial planning side.

to give us, no one can tell the future, right? But to give us some indication on what’s gonna happen. For example, when COVID really started to come out, we were really talking with our clients, hey, inflation’s going to be a thing and we need to start planning for it. Now we didn’t have some magical crystal ball, it was super simple. The government is spending a ton more money, eventually we’re going to have inflation. I didn’t know by how much, I didn’t know how long it was gonna take for it to kick in, all of those things were an unknown, but it’s like, hey, there’s gonna be a bill due with this at some point in time.

how do we need to plan for it? So even though there’s things that are outside of our control, that doesn’t mean we should be oblivious to them. We should be aware of those things. And okay, I can’t control inflation. I can’t control government spending, like those things. I can vote, right? But then after that, it’s kind of out of my hands. But what things can I do if I start to get worried about this?

Luke Eberly (07:40)
You’ve heard this, I’ve bet many times from your clients, but a common question or concern that I’ve had over the last couple of years, especially is what are we doing about inflation? Am I okay for inflation? Because we all go to the grocery store, right? We all go and buy things and we’re looking at the price tag and then our retirees get their notice of their FERS increase for the year and they go, Hey, the price of groceries.

Increased by X amount my FERS benefit increased by a lot less than what I’m seeing at the grocery store. Am I still okay? Can I still do this? Because what do they have to do? Micah? They have to source those funds from somewhere else, right? Their first is is what it is. F E H B. We’re going to talk about that in a bit. Maybe those cross have also gone up, decreasing what they’re getting from a net pay stub.

from their FERS pension, I should say, not a pay sub, FERS pension, but then they’ve got a source from elsewhere. So where do they source it from, Micah? They got to source it from their portfolio.

Micah Shilanski (08:50)
There’s one or two places they either have to cut their lifestyle or what they have to do is they have to take more money out of their retirement savings. And the question is, that a safe thing to do?

Luke Eberly (09:00)
Right. Because if you’re retired, you’re not making more money at that point. So so inflation is a really scary thing because your portfolio is what it is unless you are wanting to go back to work or can go back to work or can cut these expenses, like you said, in periods of high inflation. So it’s something that I would encourage everybody listening to start thinking about before even retiring, because this is something that really impacts our retirees is this inflation.

and planning for this inflation, how am I going to cover this increased potential increase to cost of goods while my FERS and my social security are going to be fixed during retirement or pretty much fixed with a little bit of an a-freeze? Really important to start thinking about now.

Micah Shilanski (09:47)
Boy, Luke, I love that. So let’s dive into the weeds a little bit more on this one. When we talk about inflation, I’m sorry, we’re talking about COLA, cost of living adjustments for retirees. Let’s talk about how that works. ⁓ And so number one, let’s say you’re under the FERS retirement system. Now remember, right, there’s one of three criteria you generally have to make in order to retire on a full and immediate pension. The MRA, minimum retirement age of 30 years of service. You’ll be age 60 with 20 years of service, or age 62 with at least five years of credible service for retirement.

So if you met one of those early retirements, we can talk about those separately, but if you met one of those gates, the next thing that you’re gonna really see is when your cost of living increase affects your pension. And that doesn’t happen until the year you turn 62. Now, why is this so important? Well, let’s say you retired at 57 years young, and let’s say your birthday was in January. You retired in January when you’re 57 years young. There’s no way pay increase that year are at 58 or 59 or 60.

at 62 after it’s the right, the December, after you turn 62 is when that’s gonna kick in. Now it’s like five, almost six years later, now you’re getting this pay increase, which is coming. And Luke, is that, that cost of living adjustment? Is that retroactive? you gonna say, oh man, Luke, I’m so sorry you didn’t get that cold for the last five years? We’re just gonna make all that up in one lump sum to you.

Luke Eberly (11:06)
I think we all probably know the answer. It is not retroactive, unfortunately. So exactly, Micah, five years ago, that’s when inflation really started to increase a lot. We’ve seen high numbers for inflation and high numbers for this COLA. So if you did retire at 57 five years ago, you do miss out on a lot of these adjustments previous to 62. Now I’m not saying don’t retire.

before 62 ⁓ because of this, it’s a factor to consider and make sure that you’re working with a professional or that you have a really solid understanding of this because that can really affect your retirement if you’re retiring before 62.

Micah Shilanski (11:51)
So Luke, let’s kind of walk through the numbers in here. So walk us through how inflation. So let’s say you hit 62, you’re under a normal FERS retirement. We’re going to talk about a revised annuitant for the revised annuitant special version in just a second. So if you’re just a regular FERS ⁓ employee, once they determine the inflation amount, what do you get?

Luke Eberly (12:09)
Yeah, so you if you’re a federal employer or anybody out there, you probably see Social Security posting these cola numbers, right? And so when they post these numbers, that’s not what the first cola is. So if Social Security comes out and says, you know what? This year, ⁓ inflation, the cola adjustment for Social Security is between zero and two percent. Good news for FERS, it’s the same percentage.

zero to 2%, it’s the same percentage. But above 2 % is where we hit this, what we call a diet cola for FURS recipients, is that between 2 and 3%, FURS cola is capped at 2%, right? So if it’s 2.1%, you’re gonna get 2 % for your cola. If it’s 2.9%, you’ll get 2%. If it’s 3%, you’re still gonna get 2%.

Above three percent, it’s a simple formula just to subtract one percentage point. So I believe it was twenty twenty three or twenty twenty four. It was eight point seven percent is what the Social Security COLA was. The first COLA was seven point seven percent, one less above three.

Micah Shilanski (13:24)
So a diet cola, right? What you get is a diet cola. Like it could be close, right? But you’re gonna get less than inflation when you actually get it that comes up. And you bring up a good point, right? About what is the inflation rate, et cetera. And this is all based on the consumer price index. I think it’s a worker’s index that they’re using. We can argue whether that’s inflation or cost of living adjustment or not. That’s irrelevant. That’s how your pension is going to be adjusted. Now,

If you’re under the RAE revised annuitant employer or first phrase, further revised annuitant employer, any of the changes that came under the 03 BA, the One Big Beautiful Bill Act, you’re paying more for your pension, right? And that one do affect around 2013, 2014, right? And if you’re paying more for your pension, however, your benefits did not change. So if you’re under that, you still get COLA the exact same way. You still get it the same way as regular FERS, which is really nice. Your pension is calculated the exact same way, which is great.

Now, if you are a special provisions individual, this is gonna be a little different. The special provisions, generally this comes with a mandatory retirement. You’re paying more into the retirement system because of your position. You have a mandatory retirement. This could be a law enforcement officer, firefighter, ATC, et cetera. And if you’re in that category, when you retire, you get a full COLA. And not only do you get a full COLA, it goes into effect right away. So you get the same COLA calculation as they do under CSRS. And that’s the COLA calculation that you get.

It goes into effect immediately when you retire. So if you retired at 50 years old with 20 years of service, which under special provisions retirement you can, you can get your full pension, a supplement, and the COLA goes into effect the next year. So that is kind of nice. But even with that full COLA kind of coming in, that really doesn’t keep up with the cost of changes that we see with our retirees over time. And Luke, if we go back to your example and we say, okay, imagine you went into retirement and your pension was $2,000 a month.

and that’s how much your kind of net pension was. And you go into retirement at 57. So Luke, from 57 to 62, is your pension gonna go up or go down from that net $2,000 a month from 57 to 62?

Luke Eberly (15:34)
So the important number is net, right? Because the gross is going to stay the same. Yes. The gross is going to stay the same. But what gets deducted from that? Well, FEHB is getting deducted from that FERS. And Micah, I think we talked about this earlier. think it was what, 11.2 is the average increase to FEHB in 2025. Is that correct?

Micah Shilanski (15:57)
Yeah, 11.2 % in 2025 was the average. Every plan is different, right? So I’m sure, but that is the average that OPM put out.

Luke Eberly (16:04)
Let’s

say you retired last year and you were getting the net 2000. Well, now you’re going to get a little bit less than a net 2000 because your FVHB went up potentially, right? That’s an average. There’s lots of plans, lots of different increases, but you’re going to get less as a net pay stub. And Micah, did cost of goods and groceries and whatnot, did they go up this last year?

Micah Shilanski (16:27)
Well in Alaska they sure as heck did. Now when I go to the grocery store it’s like two little bags are like 200 bucks right? It’s a hundred bucks a bag. It’s nuts.

Luke Eberly (16:35)
Right,

so your buying power, right? Your buying power of that FERS pension is definitely going down. Especially if you’re not getting that, that COLA each year. But I would argue even if you are getting that COLA, there, there is a good chance that the buying power of that FERS pension that you’re getting is decreasing just because of the factors we talked about that.

Is the cola keeping up with inflation? I’m not sure. Is the cola keeping up with FEHB inflation as well? I’m not sure. So that’s why it’s so important to have a plan for if these things happen in retirement, where are you going to source these dollars from if you don’t have the flexibility of spending less to adjust for this increase to the cost of living and increase to FEHB?

Micah Shilanski (17:23)
Luke, you’re spot on, right? And this also goes into the question about social security at 62 as well, because social security is gonna get some cost of living adjustment. Yes, it’s calculated slightly different than your first pension is calculated. But do we turn on our social security at 62? Do we wait till our full retirement age between 66 and 67, right? Do we wait till 70 in order to turn on our social security? And I think inflation plays into this question with when to turn your social security on. I think it’s gonna play in a couple of different ways. Number one,

What’s your cashflow? Right, to your point, Luke, if you went into retirement at 57, now you’re 62, the first supplement has gone away, your net pension has gone down for the last five years, right? Because FHB has gone up, not quite double digits every single year, but it’s gone up a lot over the last five years. So that premium is dramatically more than what it is now. And if you feel you’re taking the most out of your retirement account, you safely can.

Maybe we need to turn social security on a 62. Maybe cashflow is kind of the thing that says no, we have to. Now, if you don’t have to, now it becomes this rate of return kind of question we need to balance back and forth about. Does it make sense to delay our social security? And Luke, I know you and I, one of the reasons we like to delay our social security is we’re using it as an inflation hedge because every year social security grows, you defer social security, it grows at rough numbers between 62 and your full retirement age, what.

about six-ish percent of years where it’s going to increase. And then from your full retirement age to 70, roughly 8 % a year it’s going to increase. So if you’re just looking at it as a percentage rate of return, okay, let’s say inflation was 4%, but my social security if I defer it grows by six. Okay, maybe this is counteracting a little bit of that pension not growing as well if I’m choosing to delay that social security. Luke, am I on track with that or is there anything that’s kind of missing from there?

Luke Eberly (19:11)
Totally. think that’s, mean, social security, as you know, there’s a lot of factors. There’s a lot of concern. Is it going to go away? Is it going to be the same as well? And the one factor that you didn’t mention also with social security to just tangent there real quick is, is longevity as well. Right. There are some people that say, you know, my family has a history of longevity. They live to the hundreds. Right. So maybe it makes sense to delay because then you’re getting the biggest benefit.

that’s going to increase over time and really hedge against inflation into your hundreds or your nineties. So that’s also a factor too, but inflation again, I said inflation, even with thinking about living long, you want to make sure that your benefit is, is keeping up with inflation as best as possible. So it may make sense to delay a lot of great factors there to consider.

Micah Shilanski (20:03)
Yeah, so we have the FEHB increases that are taking place. have social security that’s going to be out there, et cetera. So we talk about all these things that are outside of your control, right? Okay, let’s start talking about some things that are inside of your control. What can you actually do about this? No, we cannot individually control inflation. This is where I insert my one political joke. Please give me at least a sympathy laugh. ⁓ You know, the biggest problem with this administration, actually the same as the last administration, they don’t return my phone calls. Like I got great ideas, right? But they don’t return my phone calls. All right, so since they don’t,

We gotta go back to the things that you can control. What can we control? The TSP. Okay, sure, we can control the investments. I’m not saying you can control the CS and I funds or any of the investments in there, but you can control your contributions. You can control your allocations. You can control if I’m putting money pre-tax or tax free. You wanna know a huge hedge for inflation? Beating the IRS out of tens of thousands of dollars in taxes, right? You want to transform inflation into your benefit.

come up with a solid tax plan that you dramatically less in taxes. Well, that’s just more net money to you. It’s another tool in the tool chest to have you outpace inflation.

Luke Eberly (21:08)
Exactly. And beyond the TSP, maybe you say, you know what, saving for the TSP is, it’s maybe just not enough. Take a look at doing some Roth contributions, right? Take a look at your income, make sure that you can make a direct one or maybe a backdoor Roth. would encourage you to work with a professional if you’re unsure of those differences and how to invest those dollars, because that’s not the TSP. have to invest those dollars separately. It’s a separate account, but that’s a way to save. You can open a brokerage account.

and start building up dollars there as well. If the TSP Micah is not sufficient, do you think for retirement and supplementing the living costs that you’re going to incur while retired?

Micah Shilanski (21:51)
Word of caution, just because you’re working with someone that prepares your taxes does not mean you’re working with a tax professional who does planning. These are different things. I’m not ragging on them at all. Like we need people that prepare taxes and do a solid job of this, but Luke and I were working with a new client and it was painful. It was just painful. I’m so glad they came in. They were transparent with their stuff. They showed us the things, but they didn’t want to hire us in this previous year. They wanted to wait till this year in order to hire us.

things we could have done in the previous tax year that we just missed that cost the client tens of thousands of dollars in taxes, which I don’t think is even close to an exaggeration, tens of thousands of dollars in taxes. And they’re very good. CPA was very good at writing down historically what had happened.

and not planning for the future. And that’s the difference in a tax preparer versus someone doing tax planning. A tax preparer is gonna very accurately tell us what happened last year. They’re historians. We need historians. It’s required by law, right? We gotta file taxes. But we also need planning. That’s not required by law. The IRS does not mind if you overpay them in tens of thousands of dollars in taxes. That doesn’t bother them. It bothers me. It bothers Luke. It keeps us up at night. ⁓ But we want to make sure that you guys are taking care of some.

It doesn’t have to be us, can definitely be somebody else. But that long-term tax plan, and Luke, think it really comes down to, it’s not what the client knew they didn’t know, it’s what they didn’t know they didn’t know. They knew about some of their areas of ignorance is why they were coming to us to fill it in, but they had no idea these other things that they were missing, because they’ve just never been educated in that. So these are areas you got to be really careful of.

Luke Eberly (23:29)
Couldn’t agree more. Yeah. What you don’t know, you don’t know can really hurt you because like that client, they didn’t know. They thought, you know, we’re doing the best thing and they just didn’t know that they were missing out on, yeah, literally tens of thousands of dollars of savings.

Micah Shilanski (23:47)
Yep, so super painful. Well, they’re patriots, really paying down that deficit. So I do appreciate that. All right, ⁓ getting back to some action items, right? This podcast is all about action. Our job, our goal is to help another million federal employees with their retirement. We cannot do this without your help. So share this information, send it out there, help us with these algorithms to really blow this information up to federal employees. We really appreciate it, because we want you to be able to transform your retirement. Luke I’d say another action item for our listeners is to really

have a plan that is set up to outpace inflation. But while these things we can’t control, we need to control our controllables. And we need to do some things to set us up at least the best foot forward to outpace inflation.

Luke Eberly (24:30)
couldn’t agree more and because we don’t know what inflation is going to do in the future. We don’t know what inflation is going to do. If you’re listening and thinking about retiring the day you retire, who knows? But if you have a plan to protect and to hedge against this and to provide, you know, if inflation is more than what your FERS is, then you can sleep well at night and you can go into retirement knowing that you have a plan for when this pops up.

Micah Shilanski (24:56)
Yeah, and fantastic. All right, so that’s the biggest things to think about is how inflation works, how it is gonna affect you, how your colas work, come up with that individual plan. Luke, thank you so much for joining us. Boy, when we start these things, it’s like five minutes into it, how are we gonna talk about it? And 20 plus minutes later, like, no, we need to wrap this thing up. So it has been a lot of fun. We like geeking out on this stuff. And until next time, happy planning.

The content in Planner Federal Retirement is for general informational purposes only and should not be considered individualized advice. Investing involves risk, including possible loss of principle, and past performance does not guarantee future results. Guests are not affiliated with CWM LLC Investment Advisory Services offered through CWM LLC and SEC Registered Investment Advisor. Planner Federal Retirement is not affiliated with the federal government.