This Wednesday, October 14, the government announces the 2027 cost-of-living adjustment. For a lot of federal retirees, it’s the single biggest number that decides whether next year’s budget gets tighter or not.
In my work as a financial planner for federal employees, the questions I get this time of year are always the same: how much will it be, do I get it, and when does it show up? Here’s what you need to know before the announcement.
How the COLA is figured
The COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. The government averages CPI-W for July, August and September of this year and compares it to the same three months last year. The percentage increase between the two is the COLA.
Last year’s third-quarter average was about 317.3. July and August of this year came in at about 327.1 and 328.5. If September lands close to August, that points to an increase of roughly 3.3% to 3.4%. Some forecasters, like The Senior Citizens League, have said 3.5%. None of these numbers is official until the announcement, so treat them as estimates.
Who gets the full COLA
Social Security recipients get the full COLA. So do CSRS retirees. If inflation comes in at 3.4%, a CSRS pension goes up 3.4%.
FERS retirees are different. FERS pensions get what’s often called the “diet COLA”:
- If inflation is 2% or less, your FERS COLA matches it.
- If inflation is between 2% and 3%, your FERS COLA is a flat 2%.
- If inflation is over 3%, your FERS COLA is inflation minus 1%.
So if the final number is 3.4%, FERS retirees who are eligible would get about 2.4%. Over a long retirement, that 1% gap compounds. It’s one of the quieter reasons a FERS pension loses purchasing power over time.
Who has to wait
This is the part that surprises people. Most regular FERS retirees don’t get a COLA at all until age 62. If you retired at 57 with 30 years, your pension stays flat for five years. When you turn 62, you don’t get a catch-up for the years you missed. You simply start receiving COLAs from that point on.
There are exceptions. FERS retirees under special provisions (law enforcement, firefighters and air traffic controllers), FERS disability retirees and survivor annuitants generally get COLAs regardless of age.
The FERS Supplement never gets a COLA. The good news is that it only runs until 62, so the damage is limited.
When it shows up
The new COLA takes effect December 1 and shows up in the payment you receive in early January. If you retired during the past year, your first COLA may be prorated based on how many months you were retired.
What it means for your plan
A COLA that trails inflation means your pension buys a little less every year. That’s not a reason to panic, but it is a reason to build some margin into your plan. If your pension and Social Security only just cover your bills today, rising prices will eventually squeeze you.
Here’s what I’d check:
- Know which COLA you get. CSRS, FERS, special provision or disability retirement all work differently.
- If you’re retiring before 62 under FERS, plan for your pension to stay flat until then.
- Use your TSP and Social Security to fill the gap. Social Security gets the full COLA, and a well-managed TSP can keep pace with inflation.
- Leave room in the budget. A plan with zero margin is a stressful plan.
Final thoughts
Wednesday’s number will make headlines, but what matters is how it applies to you. Know your rules, know your gap, and make sure your plan has enough room to handle prices that keep going up.
If you’re a federal employee within 5 years of retirement and want a plan built around your FERS benefits, book a free call to see if we’re a fit.
Dallen Haws, CFP®, is the founder of Haws Federal Advisors, which helps federal employees plan their retirement. This article is educational only and is not tax, investment or legal advice. HawsFederalAdvisors.com