How Do The FERS COLAs Work?

As a federal employee, one of your greatest benefits is your FERS pension, and one of the greatest aspects of your pension is the cost-of-living adjustments (COLAs) applied while you’re in retirement. The reason these COLAs are such a powerful part of your pension is that they will help you maintain your standard of living during your retirement as prices increase. For those of you who are not familiar with COLAs, they increase your monthly pension payments and are based on inflation. For those of you who are familiar with COLAs or are receiving COLAs to your military pension, or VA disability compensation, the FERS COLAs have some significant differences that every federal retiree needs to understand. So, this week we’ll do a quick review of the FERS COLA.

How Are COLAs Determined?

Each year’s COLA is determined by the change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which the U.S. Department of Labor calculates from the third quarter average of the previous year to the third quarter average for the current year.

This means that if the CPI-W shows that prices have increased, then FERS pensions will receive a COLA. However, unlike Social Security, CSRS pensions, military pensions, and VA compensation which have COLAs identical to the CPI-W growth rate, FERS COLAs are less generous.

The FERS COLA formula is as follows: If the increase in the CPI-W is 2 percent or less, the COLA is identical to the increase. But if the CPI-W increase is more than 2 percent but no more than 3 percent, then the COLA is limited to 2 percent. However, if the CPI-W increase is more than 3 percent, the adjustment is 1 percent less than the CPI-W increase.

COLAs In The First Year Of Retirement

COLAs are effective each December and are applied to your pension payment for January of the following year. If you have been retired for less than one year, your COLA will be prorated at 1/12th of the adjustments for each month you were receiving benefits. So, for instance, if you retired in January, your first adjustment will be made in January of the following year and would be for 11/12ths of the COLA amount. Or let’s say you retired in February, then your adjustment would be 10/12ths. So, to get the full COLA, you must have retired no later than December 31 of the prior year. Keep in mind that all subsequent COLAs will be for the full amount.

COLA Eligibility

FERS COLA increases are not provided until age 62, except for the following:

  1. Those who retired on disability retirement, except when receiving an annuity based on 60 percent of their high-3,
  2. Military reserve technicians who lose rank or military membership due to a disability and were age 50 or older,
  3. Special Provision Employees (LEO, firefighters, ATCs),
  4. Spouses, former spouses, and insurable interest survivor annuitants.

Note: COLAs for Children follow the CSRS COLA rules.

Source: OPM FERS Handbook Chapter 2

Final Thoughts

Understanding how your pension will or will not keep up with inflation is critical to having a successful retirement. Now that you understand the basics of the FERS COLA apply this newfound knowledge when creating your retirement plan. If you’re concerned with the possibility that your pension will not keep up with the cost of living, it could make sense to save more for a larger buffer (more in your TSP) or utilize a more conservative distribution rate (take out less from your TSP). If you don’t feel confident in creating your financial plan, consult with a qualified financial planner.

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Author: Jose Armenta, MsBA, CFP®, ChFC®, EA

Hi, I’m Jose Armenta, a Certified Financial Planner practitioner. For over 14 years, I have worked with or among federal employees, from serving in the Marine Corps to my stint as a police dispatcher and now as a financial planner specializing in helping FERS federal employees. In that time, I have spoken to hundreds of federal employees about their benefits and retirement. Helping federal employees maximize their benefits, reduce taxes, and live confidently is a passion of mine. When I am not perfecting financial plans, you’ll find me at the shooting range, playing the drums, or breaching blanket forts with my three little ones.