Each year federal employees get to experience a tug-of-war about whether or not they will get a cost-of-living adjustment (COLA). The tug-of-war happens because the cost-of-living adjustment can be determined either through legislation or through an executive order. Because we frequently have a divided government, there is often a back-and-forth over this topic. This post describes the COLA process and how I’m utilizing my 2019 federal cost of living adjustment to boost my savings rate.
Understanding federal cost of living adjustments
Although the fiscal year runs from October 1 through September 30, COLAs typically happen on January 1. (Just one more reason these are complicated). This year, the president signed an executive order freezing civilian pay. However Congress had not passed a budget when January 1 arrived. Therefore no action was taken until the end of the shutdown. At that time Congress and the president had agreed to a funding measure to end the shutdown that included a 1.9% cost-of-living adjustment for the general schedule employees.
How we typically handle COLAs
My wife and I always look at an increase in pay as an opportunity to increase our savings. This year I had decided that I wanted to increase my TSP contributions. I know I had written previously about why I did not max out my TSP. However the more I learn about personal finance the more I wanted to max out this account.
I like the TSP for multiple reasons. The first is that it has extremely low fees. In fact I cannot think of a 401(k) or other retirement plan that has as low of fees as the TSP. Secondly savings in the TSP are tax deferred. At this stage in our lives Mrs. GovWorker and I are probably making close to the most money we will ever make. This means it’s a great time to defer paying taxes until hopefully we are in a lower tax bracket.
Fellow blogger Military Dollar really convinced me that this is a smart strategy. By putting my raise directly into my TSP I am able to save the entire pay increase! If I were to have save this in a post-tax account or a Roth account, I would have only been able to save 2/3 of that amount. This extra amount will compound and grow until I want to access this money.
My 2019 Federal Cost of Living Adjustment numbers
The 1.9% cost-of-living adjustment is not applied equally to all federal employees. In fact throughout my 18 years of federal service I’ve never been able to figure this out. Each year they announce that a certain fraction of the cost of living adjustment is applied to the base pay and another percentage of it is applied to locality pay. It is super opaque. For the first time ever, I calculated my actual COLA. My gross pay increased by 1.67% (I am in the “Rest of the US” locality pay area). So I guess this means that regions with higher locality pay get a bigger cost-of-living adjustment.
In the past, I would wait until the raise showed up and then set up a new “financial allotment” to pull this extra pay out of future paychecks before I ever saw the money. This year since I wanted to save it in a tax deferred account it was slightly more complicated. It was also complicated by the fact that the cost-of-living increase was retroactively applied to the first several pay periods of the year.
Because of the retroactive pay increase, I got a paycheck that was $500 bigger than the previous one. I set that aside into our emergency fund. Then I waited two weeks until I got my next paycheck and took that extra amount of money and increased my TSP again. Two weeks later my paycheck was still bigger by the amount of tax savings that generated. So I upped my TSP contribution again by that amount. Finally the resulting difference between the amount going into my bank account and the amount that was going in before the cost-of-living adjustments was pretty close to equal so I stopped messing around with it.
Other savings adjustments
At the same time I decided to stop saving in my Roth IRA. I put that biweekly Roth contribution into the TSP as well. As a result, I was able to greatly increase my retirement savings.
Together I was able to increase the amount I was putting in my TSP from 5% of my salary to 11% of my salary. It feels amazing to increase the amount of money I’m saving without actually changing how much money I’m spending every month. In fact it seems magical.
Perhaps I will regret this when I am 70.5 years old and need to withdrawal money at a high tax bracket. This could conceivably happen if I work until my MRA and collect a full pension with full health benefits. If I did that, then I won’t need any of this money. In this “worst case” scenario I might end up paying slightly more taxes than I am paying now. However if that is my worst case scenario, then the future is pretty bright and paying a little bit more in taxes isn’t going to make or break me.
Summary
- My 2019 Federal Cost of Living Adjustment (COLA) was 1.67% (Rest of the US locality area)
- I used the money to increase my TSP contribution and was able to save the entire amount tax free.
- I’ve switched up my previous TSP strategy and hope to max it out when Kid3 stops needing daycare (if not before)
Nice summary on what happened this year. At some point I think I lost track of whether we were getting a COLA or not until everybody in the office started getting upset that the retroactive pay was being put on late. It’s certainly nice to have the baselined COLA increase to help the Fed salary keep up!
My wife maxes out her TSP contributions every year. It’s a top-notch plan.
Good job investing your COLA.
Why stop contributing to Roth IRA? To save more on taxes?
Sounds like you’re doing everything right. Well, stopping contributing to the Roth makes me a little nervous, but then again I don’t have a TSP so I can’t say whether that’s the right call. It sounds like you’ve thought out the tax implications pretty well, which is what matters.
Go you!