3 Steps to Reduce the Impacts of the Military Retirement Cuts

As you may have read in the news, a two-year budget deal was proposed by Rep Paul Ryan (R) and Senator Patty Murray (D). The deal proposes to reduce the Cost of Living Adjustment (COLA) by 1% from the Consumer Price Index for military retirees under 62. The proposal enraged the public and may be taken out of the bill this month. The political fallout was too much and was exasperated when Mr. Ryan said that military retirement reform was supported by all the Secretary Chiefs; however, none of the Chiefs knew nor did they, later we found out, agree with the COLA reduction. But if this is/was as concerning to you, as it was for me, then this blog post will explain what the reduction would mean to your retirement and how to reduce those impacts.

How would or does this COLA decrease affect you?

First of all, this would start in 2015 for only those currently receiving a military retirement check and for those under the age of 62. The Consumer Price Index (CPI) measures the price changes for different goods and services and basically tracks if prices of the stuff we purchase everyday is increasing or decreasing. The CPI is measured by the Bureau of Labor and Statistics and more information can be found here: http://www.bls.gov/cpi/.  Currently, at the start of every year, your military retirement is adjusted for inflation based off the CPI change.  Your military retirement is “fixed” and is based on the retirement plan you retired with.  It only changes with inflation, but once it is adjusted for inflation, then you are still getting paid the same.  Inflation is a slow, often invisible killer and is the biggest risk to anyone’s financial plan.  Inflation reduces your purchasing power and you have to pay more to purchase the same goods or services (i.e. movie theatre tickets, gas, food, electricity, etc.)  This is one of the major reasons that the military retirement system is highly coveted and we sacrifice so much for it.

This budget deal proposes to reduce the annual COLA by 1% of the CPI.  So, if implemented, every year your retirement check would always lag the CPI by 1%.  Over a long period of time, this “decoupling” from CPI would have a huge, negative-compounding effect.  If this deal were to be passed, here are some steps that would have stopped the negative-compounding problem and should be considered by retirees regardless.

Steps to reduce the impacts of the proposed military retirement budget cuts.

• Move to a lower cost area – Except for the annual COLA, your retirement is fixed based on your basic pay.  If you move to a high cost of living area then your retirement check would be worth “less” than someone who chose to move to a lower cost area.  The COLA is adjusted to the national CPI and is applied equally to all retirees regardless of location.  If these budget cuts were imposed, then moving to a lower cost of living area would give you a “theoretical” increase in purchasing power that could limit the impact of a COLA reduction.  This is something all retirees and those close to retirement should consider.  Most civilian pensions operate the same way as the military retirement and living in a higher cost of living area takes more of your “fixed” retirement income.
• Reduce debt levels – Reducing your debt is always a quick way to “increase” your income whether you pay something off and now you have that payment back as disposable income or you reduce your debt levels and your minimum payment is decreased.  Either way, when facing a potential decrease in your “fixed” income, paying off debt is always a good way to have more money.
• Purchase inflation-protected investments – There are several investments you can make that would help bridge the gap from a 1% loss of your retirement compared to the CPI.  The first is dividend-paying stocks.  You could modify your current portfolio and increase the yield by 1% by investing in higher-paying dividend stocks.  If you stick to “blue-chip” stocks then you would also be better protected against violent volatility as dividend-paying stocks tend to weather market volatility better.  Another option is to invest in Inflation-protected bonds through major mutual fund companies like Fidelity or Vanguard.  These types of bonds have a yield that goes up as inflation goes up and would protect you against inflation increases.  Both of these strategies should be considered for retirees, but not really for younger people as they are more conservative and wouldn’t have as much capital appreciation.

What do you think about the potential COLA cuts?  Should we reform the military retirement?