For federal employees who retired in 2025, the January 2026 annuity payment brings a welcome adjustment, but likely not the full amount expected. As reported by FEDweek, while the 2026 Cost-of-Living Adjustment (COLA) has been finalized at 2.8% for CSRS and 2.0% for FERS, recent retirees are subject to strict prorating rules that significantly reduce this first increase.
Understanding the mechanics of this calculation—and the specific “traps” built into the FERS system—is essential for accurate financial planning in your first year of separation.
📉 The Math: Why Your Raise Might Be Smaller
The “first-year proration” rule surprises many new annuitants. Federal law dictates that you only receive a COLA for the portion of the year you were on the annuity rolls before the December 1 effective date.
Sound Data: The 2026 Proration Schedule Because the 2026 COLA is effective December 1, 2025, your increase is calculated based on how many months you were retired prior to that date.
- The Denominator: The law divides the full COLA rate by 12.
- The Multiplier: You receive that fraction for each month you were on the rolls.
Example Scenario: If you retired on June 30, 2025, your annuity began July 1. You were on the rolls for 5 months (July–November).
- CSRS Calculation: 2.8% ÷ 12 × 5 months = 1.17% COLA
- FERS Calculation: 2.0% ÷ 12 × 5 months = 0.83% COLA
Note: If you retired after November 30, 2025, your first COLA will be 0%. You will not see an increase until January 2027.
⚠️ The FERS “Diet COLA” and Age Trap
For FERS retirees, the news is compounded by two structural limitations that depress long-term purchasing power compared to their CSRS counterparts.
1. The “Diet COLA” Cap The 2026 adjustment highlights the “Diet COLA” feature of FERS. When the relevant inflation index (CPI-W) falls between 2.0% and 3.0%, FERS retirees do not get the full inflation match. They get a flat 2.0%.
- Inflation (CPI-W): 2.8%
- CSRS COLA: 2.8% (Full Match)
- FERS COLA: 2.0% (Capped)
- The Gap: FERS retirees permanently lost 0.8% of purchasing power this year alone.
2. The Age 62 Exclusion Most FERS retirees are ineligible for any COLA until they turn 62.
- The Reality: If you retire at your Minimum Retirement Age (MRA) of 57, your pension will remain flat for five years. In a high-inflation environment, this fixed income loses significant value before your first COLA ever kicks in at age 62.
- Exceptions: This rule does not apply to Special Provision employees (LEOs, Firefighters, ATC), Disability retirees, or Survivor annuitants, who receive COLAs immediately regardless of age.
🛡️ Don’t Let Inflation Erode Your Retirement
The difference between a 2.8% raise and a 0.83% prorated raise is a shock to the monthly budget. When you combine prorating with the “Diet COLA” and the Age 62 exclusion, your retirement income plan needs to be far more robust than a simple spreadsheet.
This is where Internal Benefit Advisors serves as your strategic partner. We help you build a plan that accounts for these “hidden” reductions.
How We Help You Plan for Real-World Income:
- Retirement Date Strategy: We analyze how your specific separation date triggers (or misses) the prorating cycle, helping you time your exit to maximize your first-year income.
- Inflation-Proofing: We help you structure your Thrift Savings Plan (TSP) withdrawals to bridge the gap during the “no COLA” years (ages 57–62), ensuring your standard of living doesn’t dip while you wait for the government to catch up.
- Net Income Projections: We provide realistic annuity estimates that factor in the “Diet COLA” drag over 20+ years, so you aren’t relying on an inflated view of your future purchasing power.
The COLA rules are rigid, but your plan doesn’t have to be.
Contact Internal Benefit Advisors today for a comprehensive retirement income analysis.
References
- FEDweek. “On Annuity COLAs, Recent Retirees Should Note Prorating.” December 30, 2025.
- Social Security Administration. Cost-of-Living Adjustment (COLA) Information for 2026.
- U.S. Office of Personnel Management (OPM). FERS & CSRS Cost-of-Living Adjustments.
- Internal Benefit Advisors. Retrieved from https://internalbenefitadvisors.com
