A recent study reveals that 68% of pre-retirees are considering delaying retirement, an increase of 4% compared to the year before. A top concern is the impact of inflation driving up the cost of living expenses. In fact, experts say that inflation is likely the reason many Americans have been struggling to save more for retirement in recent years.
How Inflation Impacts Your Buying Power In Retirement
Let’s take a look at the problem with a dollar-and-cents example: in 2024 you would need a little over $2 to equal the buying power of $1 in 1994. That’s a loss of more than 50% in purchasing power over the last three decades. Even if you use the historic average of inflation which is 3% per year, $60,000 of retirement income today will have the purchasing power of about $33,000 in 20 years.
“Keep in mind that FERS/CSRS COLAs are based on the yearly Social Security COLA which hasn’t been keeping up with a major expense for retirees: healthcare inflation.”
FERS COLAs Are Not Keeping Up With Inflation
As a FERS employee, Cost-Of-Living Adjustments (COLAs) on your annuity (pension) are not likely to keep up with inflation. Why? Because COLAs for FERS retirees are capped at 2% when consumer prices increase between 2% and 3%. For example, in 2025, FERS retirees will only receive a 2.0% COLA while CSRS retirees get the full 2.5% COLA. Nicknamed the FERS Diet COLA, it’s based on a rule that’s been in effect since FERS was created in 1986. Keep in mind that FERS/CSRS COLAs are based on the yearly Social Security COLA which hasn’t been keeping up with a major expense for retirees: healthcare inflation.
The Skyrocketing Cost Of Healthcare
As you know, the most recent increase in the average cost of FEHB premiums for non-postal employees was 7.2%. Although the government will continue to pay up to 75% percent of your FEHB premiums in retirement, the cost of deductibles and copayments are clearly on the rise with no end in sight.
Even worse, according to the US Department of Health and Human Services, from January 2022 to January 2023, more than 4,200 prescription drugs had price increases, nearly 50% of these increases were higher than the overall rate of inflation, and the average drug price increase was 15.2%. Add to this, with around 10,000 baby boomers turning 65 every day, administrative costs are also on the rise accounting for about 25% of total healthcare spending.
When you consider these numbers, it’s no surprise many pre-retirees are delaying retirement. Create a financial plan that can help inflation-proof your retirement income. Connect with an FRC® trained advisor to learn more.
