When it comes to Cost of Living Adjustments (COLAs), FERS participants are at a disadvantage in two significant ways. First, they receive less than the full COLA that CSRS retirees receive. Second, they’re not even eligible for their reduced COLA until they turn 62.
Why FERS Retirees Receive A Reduced COLA
Nicknamed the FERS Diet COLA, the adjustment is capped at 2% when consumer prices increase between 2% and 3%. When consumer prices increase by 3% or more, the FERS COLA is reduced by 1%. For example, in 2023 the 8.7% COLA was the highest in over 40 years. Yet, FERS retirees were only entitled to a 7.7% increase.
This has been the rule since 1986 when FERS was first created. It was decided that a reduced COLA was justified because FERS retirees receive income from three sources: their Thrift Savings Plan (TSP), their annuity (pension) plus their Social Security benefit. However, when you consider that COLAs have not kept up with inflation over the years, the FERS reduced COLA isn’t fair at all.
The COLA Age Restriction For FERS Annuitants
The COLA age restriction is another disadvantage. If you retire under FERS at your MRA with a full (unreduced) annuity (pension), you’re not eligible for a COLA increase until you turn age 62.
For example, FERS participants born in 1970 or after are eligible to retire at age 57 with 30 or more years of service. However, they will have to wait five years until they turn age 62 to receive any COLA at all. And when they do get the COLA it’s calculated at the lower rate.
“In addition to becoming eligible for COLAs at age 62, working the extra years may increase your annuity.”
Why Waiting Until Age 62 To Retire May Be A Better Strategy
If you wait to retire at age 62 (or older), your FERS monthly benefit gets a 10% bonus because your annuity (pension) is calculated with the 1.1% formula instead of the 1% formula used when you retire at your MRA. Though the difference may not seem that much, it works out to a 10% increase in your monthly FERS annuity (pension).
In addition to becoming eligible for COLAs at age 62, working the extra years may increase your annuity. Since many FERS workers earn more at the end of their careers, working longer can increase your High-3 salary calculation and give you more time to grow your TSP.
Before you decide to retire at your MRA, touch base with an FRC® trained advisor who can help you crunch the numbers to see if waiting until age 62 makes more sense.
