At Reed Financial Planning Services, we focus on working with CT public school teachers and their families. We know that there are many unique aspects to the Connecticut Teachers' Retirement Board pension (CTRB) and one of them is the cost of living adjustment or COLA. This article talks a bit about how the COLA works and why it is so important to consider when a teacher is planning for his or her retirement.
For many teachers, their CTRB pension is the household’s largest source of retirement income. One of the challenges for a retired teacher is that the CTRB’s pension does not have a strong COLA. COLAs are put in place to increase income annually in an attempt to keep pace with inflation. The CTRB pension does offer a COLA, however, it is first linked to social security. In years that social security doesn’t offer a COLA, retired teachers do not get any increase in their annual pension amounts. We experienced this back in 2009, 2010 and again in 2015.
The interesting thing about the CTRB pension is that there is another layer within the COLA calculation. In years when social security offers a COLA, the CTRB pension wants to offer one too. However, they then look at the underlying performance of the pension fund. There are a few different data points that they consider, however, if the underlying performance is under certain levels, they cap the COLA for retirees.
Here’s an example. At the time of this blog post, CPI inflation stands at 6.4%. However, for members who started teaching in CT prior to July 1, 2007, and retired on or after September 1, 1992, their 2023 COLA is a dismal 1.5%! If this happens even just a few times in retirement, there can quickly become a disparity between your CTRB pension income and your retirement income needs.
This income gap needs to be filled in some way. For most, this means withdrawing from investments and other sources of retirement income to supplement the gap. It's important to consider that the gap between your income needs and your pension only widens as the years go on. This is why it’s so important to fully understand the CTRB pension before committing to retirement. It’s also extremely important to have a clear income plan which outlines which assets you’ll use first to supplement your household income and invest accordingly. Do you start taking social security earlier and thus lock in a lower amount for the rest of your life? But what about the WEP, GPO and income offsets? Or do you start withdrawals from your investment accounts? If you do so, which account(s) should you draw from first and why? And how should those investments be allocated given your withdrawal needs, the current market conditions and future economic outlook?
There are all very important topics to consider and are a part of what we do every day when we help Connecticut public school teachers and their families plan for retirement. If you or a family member work as a Connecticut public school teacher and are planning for retirement, feel free to schedule a complimentary phone consultation by clicking on the button below. We would be happy to help you!