Retirees are often aware of the detrimental effects of inflation on their retirement savings. As the cost of goods rises, the value and buying power of the dollar can diminish. For some retirees, this makes maintaining their savings and lifestyle a challenge.
This is especially important for those relying on a fixed income such as a pension (or Social Security) in retirement. As inflation increases, that set monthly pension amount buys you less and less every year, especially if no cost of living adjustment is given.
Fortunately, there are some different methods retirees can use to guard against inflation and help protect the value of their retirement. Below I discuss some of the ways inflation affects your PA state pension and how you can prepare.
Pensions are normally set, fixed monthly amounts of income that may or may not have a COLA (or Cost of Living Adjustment) provision. Some pensions do give cost of living increases on a regular basis. For example, Social Security (although not considered a pension, technically) aims to give out standard COLA increases annually, including a 2.5% increase for 2025.
The problem with Pennsylvania state pensions, both PSERS and SERS, is that there is no automatic COLA provision to increase the monthly amounts for inflation. This is disclosed right at the top of the main SERS page:
"Automatic COLAs, or cost of living adjustments, are not part of the SERS retirement benefit. As a result, you should plan that your pension payments will never increase in retirement." 1
That's a sobering thought, considering the life expectancy of retirees increased substantially over the last few decades. Your average retiree at age 62 can expect to receive over twenty years of benefits in their lifetime, meaning they may have to spend over two DECADES without any increase in their pension.
If you read on, the state has given a cost of living adjustment only eight times in the last forty years, with the last one being almost twenty years ago in 2002. That's like working a job for twenty years and never getting a raise! Even worse, it's happening in retirement, when it's not easy to simply go back into the workforce for more income.
Just looking at how prices were twenty years ago compared to today makes this an issue that merits serious attention.
Inflation is calculated using the Consumer Price Index (CPI), which calculates inflation across major categories before determining a yearly inflation rate expressed as a percentage.2
Historically, the U.S. has experienced an inflation rate of roughly three percent.3 This percentage is helpful for understanding inflation across multiple markets. But these values should also be understood as an average approach, meaning inflation can be much higher in some time periods than others.
Most Americans are very aware that their money buys much less on average than it bought just a few years ago, and with some things like cars or fuel, it's even worse.
With the above in mind, it's crucial that some planning is done for retirement outside of just collecting a pension. In my experience, PA state employees tend to over-rely on their pensions for retirement, which can lead to a failure to plan correctly.
Now don't get me wrong, the PSERS/SERS pension is certainly a fantastic benefit. Most jobs don't offer pensions anymore, so just having a pension to count on for retirement income is a big advantage. However, it can be a disadvantage if it leads to a false sense of security and a belief that the pension alone is sufficient. This is especially true if inflation continues to increase on its current trajectory.
To mitigate this, it's crucial to supplement your pension with other savings such as:
The state normally offers a Deferred Compensation Plan that you can contribute to, and Traditional or Roth IRAs are always an option considering you meet the contribution criteria. If you are able to max out your deferred compensation plan and/or your IRA's, you could also put money into a non-retirement investment account to grow money long-term (you just won't receive the tax advantages of an IRA).
A good total savings amount to shoot for is 15% of your gross annual income. Most PA state positions have mandatory pension contributions from 5%-7.5%, so you can make up the difference with savings to one of the other options.
For example, if your salary is $100,000, and your mandatory pension contribution is 6.25% ($6,250), then you would need to save the remaining 8.75% ($8,750) on your own to equal a 15% ($15,000) total contribution to retirement for the year.
Even better, try and save the 15% without including the mandatory pension contribution if you can afford it. This will ensure you aren't relying too much on your pension and gives you a much better chance of having a sufficient amount of liquid savings in retirement.
Keep in mind though that the 15% number is just an average range. You may need to save more than that, especially if you are older or have goals that require a higher level of spending in retirement. Figuring out how much you need through retirement (and how to make it last) can be very nuanced and depends on many individual factors, so make sure you understand exactly what you're doing or talk with an experienced financial planner who does.
If you're already retired, then you may have to get more intentional with your budgeting and tracking your monthly spending. It might mean coming up with a new income plan or changing the investment mix of your other assets to mitigate any inflationary effect on your pension.
Don't over-rely on your pension. Having one is a big advantage and takes a lot of pressure off your savings to generate income, but it shouldn't be your focus. In fact, you don't need to focus on your pension at all, since your contributions come out of your pay automatically and your benefit is calculated for you at retirement. No effort required!
Where your effort should go is toward saving at least 15% of your income in other avenues, like the deferred compensation plan, IRA's, or other investment accounts.
Inflation needs to be planned for. You can't count on the state to make sure your pension keeps pace and retains its purchasing power. The old adage "if you want something done right, you gotta do it yourself" fits well here when it comes to saving for retirement.
-This sentiment also explains why lifetime pensions have practically disappeared over the last few decades. Companies are no longer willing to handle the risk for increased life expectancy in pension payouts, so now mostly the states are the only ones with pension plans anymore. The responsibility for retirement savings has been placed solely on the shoulders of the employee.
Get help if you need it. This is by no means a comprehensive list of ways to protect your pension or savings against inflation. Rather, it is intended to demonstrate some of the options available to you and guide you in the right direction. If you have further questions feel free to reach out to me, I'm happy to help you plan and talk about what might make sense for you.
This content is developed from sources believed to be providing accurate information. The information presented herein is for educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security or recommendation of an investment strategy.
Certain information may be based on third-party data which may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Please consult legal, financial, or tax professionals for specific information regarding your individual situation.
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