Youâve hung up your helmet and boots, and now youâre living off your hard-earned pension. But thereâs another kind of blaze to watch out for: inflation. Even in ânormalâ times, a 3% inflation rate means prices roughly double every 24 years. When inflation flares up (like the 9%+ surge we saw in 20221), it can torch the purchasing power of your retirement paycheck. For instance, Social Security gave retirees an 8.7% cost-of-living boost in 2023 to help offset soaring prices2.Â
However, many firefighters donât get Social Security, and if your fire department pension doesnât include a similar COLA (Cost of Living Adjustment), your monthly check stayed flat while expenses climbed. In other words, rising costs can eat away at a fixed pension, leaving you struggling to afford the same lifestyle over time.
So how can you fight this financial fire? The good news is that there are practical steps to help protect your paycheck in retirement and keep pace with inflation. From understanding your pensionâs COLA (or lack thereof) to investing in the right assets and making smart savings moves, letâs break down how you can defend your retirement income against rising costs.Â
Know Your COLA
Cost-of-Living Adjustments (COLAs) are like an insurance policy against inflation for your pension. Some firefighter pension plans include an automatic COLAâsay 2% or 3% yearlyâto help your monthly checks keep up with prices. But many do not, or they come with caveats.Â
Itâs crucial to check your pensionâs COLA rules: Do you get an annual increase? Is it a fixed percentage or tied to the CPI? Is there a cap or conditional funding requirement? The answers could make a huge difference in your retirement security.
Hereâs a stark example. New Jersey used to provide COLA increases for retirees, but in 2011 the state suspended COLAs for public employees (including firefighters) until the pension fund’s health improves3. Fast forward to today, and those retirees havenât seen a single raise in over a decade. A firefighter who hung up his gear in 2011 has effectively lost nearly 25% of his pensionâs buying power due to inflation3.Â
Pennsylvania isnât much better: many municipal firefighters and police there havenât seen a pension increase in over 20 years4! Lawmakers only recently considered a special COLA to give long-retired heroes a bump of $75â$300 a month4.
PA Stalled: In Pennsylvania, some retired firefighters went 20+ years with no pension raise4, watching inflation gradually erode their income.
Donât assume your pension will automatically keep up with inflation. Check your plan documents or ask your benefits office about any post-retirement increases. If the answer is ânoneâ or âitâs conditional,â then you know youâll need to rely on other strategies (like personal savings and investments) to preserve your spending power. Even if you do have a COLA, stay vigilant: a 2% annual bump helps, but it wonât fully match 8% inflation in a bad year.Â
Now that weâve covered your pensionâs built-in defenses (or lack thereof), letâs look at how you can take matters into your own hands. One of the smartest ways to beat inflation is to invest in assets that tend to rise along with (or faster than) the cost of living.
Invest in Inflation-Fighting Assets
When you retire from the fire service, your pension might be fixed, but your expenses wonât be. Here are a few asset classes and strategies to consider:
Stocks (Equities)Â
The stock market can be volatile, but over the long run, it has been a great tool for beating inflation. Large-cap U.S. stocks have delivered around 10% average annual returns historically, which comes out to roughly 6%â7% above inflation on average5. In other words, companies tend to grow profits (and share prices) faster than prices rise, especially over multi-decade periods. If youâre investing through a 457 plan or IRA, make sure youâve got a healthy allocation to stocks appropriate for your risk tolerance.
Real EstateÂ
Real assets like real estate are another potent inflation fighter. Housing costs and rents generally go up with inflation, not down. If you own your home, rising home values can at least keep pace with inflation (and youâre avoiding rent hikes). Some firefighters invest in rental properties or REITs (Real Estate Investment Trusts) to generate income that can rise with the cost of living.Â
Real estate isnât guaranteed to increase every single year, but over the long term, property values and rental income have tended to grow alongside or above inflation in many areas. Plus, real estate gives you tangible equity â something you can potentially tap via downsizing or a reverse mortgage much later in retirement if needed.
Invest in Inflation-Fighting Assets
Build a portfolio that grows with rising costs
Stocks (Equities)
6-7% above inflation
Real Estate
tend to grow with inflation
TIPS & I-Bonds
Safe, inflation-indexed returns
Inflation-Adjusted Annuities
that rises with living costs
Treasury Inflation-Protected Securities (TIPS) & I-BondsÂ
The U.S. Treasury offers safe, inflation-indexed bonds that can be excellent for retirees. TIPS are bonds that automatically adjust their principal value with inflation, so your interest payments keep up with rising prices. And Series I Savings Bonds (or âI-Bondsâ) have been a hot ticket lately â they carry a variable rate tied to inflation. At one point in 2022, I-Bonds were paying 9.62% interest thanks to the surge in CPI6! (Try getting that at your local bank.) The catch: youâre limited to $10,000 per person per year in I-Bonds and have to hold them at least a year. But still, theyâre a great place to park some cash for inflation-beating returns, especially for the more conservative portion of your portfolio. Even as inflation moderates, these bonds ensure your savings wonât lose value in real terms. Itâs like having a hose line directly tied to the inflation rate â if inflation rises, the interest on these bonds does too.
AnnuitiesÂ
Some folks consider inflation-adjusted annuities as inflation protection tools. Indeed, certain annuities offer built-in cost-of-living adjustments (COLAs) or are specifically indexed to inflation rates, helping maintain your purchasing power over time. These “inflation-protected” or “inflation-indexed” annuities can provide a steady income that rises alongside the cost of living.Â
Whichever assets you choose, the key is diversification. By spreading your savings across stocks, real estate, TIPS/I-Bonds, annuities, etc., you create multiple lines of defense against inflation. The worst position is having too much in cash under the mattress or in a basic savings account. Keep an emergency fund, sure, but anything beyond short-term needs should be working for you and keeping pace with inflation.
Conclusion: Stay Prepared and Protect Your Future
The goal isnât exactly to beat inflation every single year (though that would be nice), but to avoid falling too far behind. Some years youâll come out ahead, other years you might tread water, but over the long haul, you want your finances trending in the right direction. Keep an eye on the horizon and adjust as needed.Â
If youâre worried about inflation throwing a wrench in your retirement plans, give us a ring. At Protection Red, our mission is to help firefighters like you craft a financial game plan that accounts for challenges like inflation, taxes, medical costs, and more. We canât douse the flames of inflation in the economy, but we can help you mitigate its impact on your personal finances. From pension optimization to smart investment and income strategies, weâll work with you to keep your retirement on track.
Appendix:
- https://www.cbsnews.com/news/inflation-june-cpi-report-hit-new-high-40-years-9-1-percent/
- https://blog.ssa.gov/social-security-benefits-increase-in-2023/
- https://www.pionline.com/article/20170220/ONLINE/170229976/new-jersey-freezes-cola-until-pension-funding-improves
- https://www.pasenategop.com/news/pennycuick-bill-providing-police-and-firefighter-pension-colas-receives-key-committee-approval/
- https://equable.org/public-pensions-protected-from-inflation/
- https://money.com/new-i-bonds-rate-beat-inflation/
