How FERS COLAs work, and why they differ

Who gets a COLA, and when

Most FERS retirees do not receive cost-of-living adjustments on their annuity until age 62. Exceptions include disability retirees, survivors, and certain special categories such as law enforcement officers and firefighters.

That means if you retire at 57, your pension does not grow with inflation for the first several years, even though prices do.

The FERS formula

When the annual increase in the Consumer Price Index for Urban Wage Earners (CPI-W) is 2% or less, the FERS COLA matches it. When it is between 2% and 3%, the COLA is capped at 2%. When it is above 3%, the COLA is the CPI increase minus one percentage point.

Social Security works differently. It adjusts by the full CPI-W increase every year, once you are receiving benefits.

Planning around it

If you retire before 62, plan for the years before your COLAs begin, and for the years when inflation exceeds 3%. Many people use savings, such as the TSP, to cover the difference, and some consider holding part of their savings in assets intended to keep pace with inflation.

Social Security's full inflation adjustment is one reason delaying it can be valuable. A larger benefit that adjusts in full every year protects purchasing power in later life.

Check your own situation

Rules vary by retirement type and category, so confirm yours with OPM or your agency. Then build a plan that assumes your costs will rise whether or not your pension does.