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What is C.O.L.A. and why is it so important?

When I give presentations to pensioners I often get a confused look when I say that their C.O.L.A. or Cost of living adjustment is probably the most valuable part of their pension. Most people find it hard to believe that a 2%-3% increase per year on their monthly income is more important than their income itself.

 

Take this into consideration:

If you have a $2,000 a month pension when you turn 60 earning a 3% C.O.L.A. at 84 you’ll be earning $4,000 per month.

 

Earning double 24 years later is great, but that’s not really profit, it’s simply keeping up with the rising cost of everything else around you.

 

The FRS and most pension plans today offer a “buyout” or investment plan option as opposed to the monthly pension. These plans are great for extra liquidity, leaving money to beneficiaries, and having control over your assets. You can also put these funds into investment products that can return a good monthly income as long as you live. But what is lost when you elect the investment plan option is your guaranteed C.O.L.A.

 

In 2011 the Florida Retirement System C.O.L.A. stopped for all future years of service. Luckily most of the people retiring now and in the next few years still have a relatively high (2%+), the younger employees are the ones that are truly suffering.

 

This is something you must factor into your retirement savings if you’re retiring from the FRS or another pension plan moving forward.