A recent study reveals that 68% of pre-retirees are now considering delaying their retirement, marking a 4% increase from the previous year. A primary driver behind this shift is the rising cost of living fueled by inflation. Experts believe that inflation has also played a significant role in hampering Americans’ ability to save adequately for retirement in recent years.
How Inflation Erodes Retirement Buying Power
To grasp the impact of inflation, consider this: in 2024, you would need just over $2 to match the buying power of $1 in 1994—a loss of more than 50% in purchasing power over three decades. Even at the historical inflation average of 3% per year, $60,000 in retirement income today would shrink to the equivalent of about $33,000 in just 20 years.
FERS COLAs: Falling Behind Inflation
Federal Employees Retirement System (FERS) retirees face additional challenges due to Cost-of-Living Adjustments (COLAs) that often fail to keep pace with inflation. Under FERS rules, COLAs are capped at 2% when consumer price increases fall between 2% and 3%. For instance, in 2025, FERS retirees will receive only a 2.0% COLA, compared to the full 2.5% COLA granted to CSRS retirees.
Dubbed the “FERS Diet COLA,” this adjustment disparity stems from a regulation in place since FERS began in 1986. Furthermore, both FERS and CSRS COLAs are tied to the annual Social Security COLA, which has not kept pace with healthcare inflation—a significant expense for retirees.
Healthcare Costs: A Growing Burden
Healthcare expenses continue to rise sharply. For instance, Federal Employees Health Benefits (FEHB) premiums for non-postal employees increased by an average of 7.2% in the most recent adjustment. While the government covers up to 75% of FEHB premiums in retirement, retirees still face growing out-of-pocket costs, such as higher deductibles and copayments.
Prescription drug prices have surged as well. From January 2022 to January 2023, over 4,200 medications saw price increases, nearly half of which exceeded the overall inflation rate. On average, drug prices rose by 15.2%. Additionally, the aging population—10,000 baby boomers turning 65 daily—drives up administrative healthcare costs, which now account for about 25% of total healthcare spending.
Plan for an Inflation-Proof Retirement
Given these trends, it’s no surprise that many pre-retirees are choosing to delay retirement. To protect your retirement income from inflation, it’s essential to create a robust financial plan. An FRC® trained advisor can help you explore strategies to safeguard your financial future and maintain your buying power in retirement.
