An Introduction To Cost-Of-Living Adjustments In Public Retirement Plans: Details Matter

Abstract

While financial planning students are expected to be able to understand client retirement plans, subtle differences in cost-of-living adjustments can have major impact on the success of client retirement plans. This teaching note compares the cost-of-living adjustments in the largest government sponsored retirement systems and a hypothetical traditional privately sponsored plan.  Using a Monte Carlo simulation, we estimate the impact on retirement experience from the different COLAs.  These differences are large, with differing protection from future inflation and differing risk for running out of money during retirement. This teaching note will help instructors address Certified Financial Planner (CFP) Board Learning Outcome G.52 “Retirement Needs Analysis”.   The material may also be used in economics, human resources, public administration, and other classes addressing policy aspects of retirement plans.