Prices in the past seem almost impossibly low compared to the prices consumers pay for goods today. This is due to inflation, and the effects of this phenomenon become apparent while arranging for retirement. Since inflation occurs annually, a retiree has to keep pace with inflation so their savings aren’t diminished prematurely.

In this article, we’ll look at how inflation affects some retirement holdings available to federal employees and how to curtail them.

Accounting for Inflation in Retirement Accounts

The Federal Employee Retirement System (FERS) comprises three components: Social Security, Thrift Savings Plan (TSP), and Basic Benefits. Yet, only a portion of the FERS automatically adjusts for inflation during retirement. Each component is automatically deducted from the federal employee’s paychecks and redeemed during retirement. As recently as December 2020, Social Security benefits will increase by 1.3% annually.

Thrift Savings Plan accounts are not automatically adjusted for inflation upon retirement. Federal Employees who retire early will have to find a way to account for inflation if they plan on drawing funds from this account. However, there are a few ways to go about this.

TSP Annuities with Inflation Protection

These are payments generated from a retiree’s TSP account. And although many don’t take advantage of it, some regulation changes within the past few years make it a viable financial option. The first change is the flat 2% increase in TSP annuities annually with the inflation protection option. This protects TSP annuities as much as other FERS annuities upon retirement.

Since September 2019, retirees can make an unlimited number of lump-sum withdrawals from their TSP account. This allows for greater flexibility to invest or cover unexpected expenses during retirement.

Utilizing Various TSP Funds

There are five core TSP funds, and there are two ways to diversify the contributions made to the various funds:

• Setting contribution allocations: This predetermines what percentage of TSP contributions are allocated to any combination of the five funds.
• Interfund transfers: This is when a federal employee moves contributions from one fund to another. Only two transfers are allowed per month and then all future transfers can only be to the G Fund.

The five TSP funds range from the G Fund to the I Fund and follow various indexes. The G, I, C, and S Funds are the best funds that account for inflation. Federal retirees can take advantage of the F Fund during times of falling or steady interest rates. But since interest rates are rising in the current economy, this fund can lose value for every percentage inflation rises.

Cost of Living Adjustments

Much like Social Security, FERS funds are eligible for automatic adjustments for inflation. The minimum age to receive these adjustments is 62, and they’re not done in arrears so benefits received before will not be accounted for.

Federal Retirees Can Manage Inflation

Inflation can seem nebulous and even cruel. But there are ways to account for this annual economic adjustment. Whether a federal employee decides to diversify their TSP contributions while employed or add an inflation protection option to their TSP fund – both will protect against the effects of inflation during retirement.