Why Federal Employees Must Prepare For Spending Shocks In Retirement

Federal retirees face numerous risks in their golden years. These risks often fall into three categories: market risk, longevity risk, and spending shocks. This week we’re covering spending shocks, meaning large unanticipated expenses in retirement, the most common of which are rising health care costs, changes in-home needs, and inflation.

While it is nearly impossible to plan for every contingency, not having a plan to fund these large expenses can derail your retirement plan. So, let’s dive in to see why these expenses can be threatening and how you can plan for them.

Health Care Costs

Rising Health Care Needs
As you age, hospitalizations, expensive prescriptions, and visits to healthcare specialists can quickly drain your nest egg.

On top of these increased medical costs, an injury or illness at an older age can quickly cascade into larger problems with expenses that are much harder to recover from.

Long-term Care
In addition to increased health care costs, you could require long-term care at some point. A 2019 U.S. Department of Health and Human Services report found that 70% of adults who survive to age 65 will need long-term care before they die.

Long-term care refers to assistance needed for daily activities, like eating, bathing, or dressing. Due to this widespread need and the ballooning cost of long-term care services, the Office of Personnel Management (OPM) contracts with private insurers (currently John Hancock) to provide the Federal Long Term Care Insurance Program (FLTCIP) a voluntary, premium-based long-term care insurance option for eligible federal families.

Planning Tip
One way to lower health care costs is by comparing plans, paying particular attention to annual premiums and maximum out-of-pocket limits; this will give you a quick sense of how much your total out-of-pocket costs could be if you had a major medical event. Generally, a plan with lower out-of-pocket costs but higher monthly premiums will be optimal as you age. Read this article to learn more about comparing healthcare plans.

When it comes to long-term care, be proactive and plan early! Some federal employees will be able to self-insure, meaning they will be able to pay for long-term care out of pocket. But for others, the Federal Long Term Care Insurance Program may be the answer. You can read more about the FLTCIP here.

Change In Home Needs

Most federal retirees want to stay in their homes for as long as possible. Although this strategy has plenty of benefits, such as remaining in a familiar place, understanding the costs, and having vast emotional value, your housing needs often change as you get older.

Eventually, your home may have too many stairs, not enough senior amenities, or could be too far from your health care and family. These changes might require significant remodeling to make your home easier to navigate or may require relocating.

Planning Tip
One way to prepare for this expense is to build in some spending cushion; this is done by using conservative assumptions when planning your retirement (rates of return, inflation rates, etc.) and maintaining an emergency fund throughout your retirement.

Another option if you want to stay in your home is to use a reverse mortgage to pay for remodeling. This strategy allows you to use your home equity to access a line of credit.

A reverse mortgage is like a conventional mortgage in that there are costs (origination fees, closing costs, etc.), and the initial loan is based on the appraised value of your primary residence.

However, unlike a traditional mortgage, you don’t make monthly payments; instead, the interest and fees are added to the loan balance each month. There are other differences like age and FHA building requirements. You can learn more about reverse mortgages on HUD.gov.

Lastly, you may decide that relocating is the optimal choice. Many retirees will choose to downsize, sell their homes, and rent. Not having to deal with property taxes and maintenance costs sounds great to many.


Easily overlooked when planning your retirement, inflation can have a devastating impact, eroding your buying power over the years. To illustrate, let’s say you retire with a monthly income of $8,000 at a 4% inflation rate; in 10 years, you’d need $11,482 a month to maintain the same lifestyle.

Although your Social Security benefits will receive the cost of living adjustments (COLAs), your FERS pension will receive a smaller COLA when inflation is over 2 %.

Read this article to learn more about the FERS pension COLAs.

Planning Tip
To maintain your lifestyle throughout retirement, you’ll have to build some inflation protection into your financial plan.

One way to address this risk is by choosing investments expected to outpace inflation, such as stocks. Yet, stocks come with their own risks (market risks); therefore, balancing inflation and market risk is essential.

In other words, we need to protect ourselves against market risk by keeping our shorter-term money liquid and safe while also having enough stock market exposure to combat inflation throughout retirement.

Final Thoughts

While adjusting for unanticipated expenses can be difficult at any time, adjusting when you’re living on fixed income can be incredibly more challenging since you have less time and fewer opportunities to increase your resources.

Hence, preparing for spending shocks by utilizing various assets such as cash, stocks, insurance, and reverse mortgages to balance liquidity with growth will be essential in retirement.

I highly recommend working with a fee-only Certified Financial Planner™ to explore different strategies. Planning long before you leave the federal government will help to ensure your retirement is a fulfilling new chapter.

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2023 Legislative Change Notice

The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.

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.