The FERS “Diet COLA” Problem (And How to Build Your Own Inflation Hedge in TSP)

Some retirement problems don’t show up in year one.

They show up in year twelve.

The FERS “diet COLA” is one of those problems.

On paper, 2026 looks fine…

Cost-of-living adjustments are coming in around 2.8%, and headlines will focus on “another raise” for retirees.

But under FERS, that adjustment gets trimmed to 2.0% when inflation falls between 2% and 3%.

That 0.8% difference is easy to shrug off in a single year.

But it’s harder to ignore when you realize every future raise is being built on a slightly smaller foundation.

So the question becomes: what can you do with your TSP to fight back against diet COLA over a long retirement?

How Diet COLA Quietly Shrinks a FERS Pension

The rules behind FERS COLA are simple… and a bit sneaky:

• If inflation is 2% or less → FERS gets the full COLA.

• If inflation is between 2% and 3% → FERS is capped at 2%.

• If inflation is 3% or higher → FERS COLA is 1 percentage point lower than the full number.

In a year like 2026:

• Full COLA: 2.8%

• FERS COLA: 2.0%

• Shortfall: 0.8 percentage points

Imagine a FERS retiree with a $40,000 gross pension:

• Full 2.8% COLA would increase that to $41,120.

• Diet 2.0% COLA boosts it to $40,800.

That’s a $320 difference in year one.

It doesn’t sound like much.

But in future years, your COLAs are applied to $40,800, not $41,120.

And the gap between “full COLA world” and “diet COLA world” widens as the years go by.

Most retirees feel this not as a single big shock, but as a slow tightening:

• The trip that used to be easy to budget for starts to feel like a stretch.

• Healthcare costs rise faster than your pension.

• Everyday prices “creep” while your check lags just a bit.

So it falls to you to take extra measures against future inflation, now.

A Simple Way to Size Your “Inflation Hedge Bucket”

You don’t need complex software to estimate what that bucket might look like.

Basic rules of thumb will get you close enough to plan.

Start with your gross annual FERS pension (before taxes and deductions). Call that A.

• Each 1% of COLA shortfall = 0.01 × A

• That’s how much extra income you’d need in that year to stay even.

Examples:

• A = $20,000 → 1% shortfall = $200

• A = $30,000 → 1% shortfall = $300

• A = $40,000 → 1% shortfall = $400

• A = $50,000 → 1% shortfall = $500

For 2026’s 0.8% shortfall:

• A = $40,000 → 0.8% shortfall = $320

That’s the amount you’d want to be able to “patch” in year one.

What Actually Goes in the Inflation Bucket?

The “bucket” is not a separate account at TSP.

It’s a mental label and an investment choice inside the account you already have.

Think of your TSP in layers:

1. Core income layer - The part that’s invested more conservatively to support regular withdrawals and coordinate with your FERS pension and Social Security.

2. Inflation hedge layer - The portion that’s invested more for growth, specifically to help deal with diet COLA and rising costs.

And inside that hedge layer, TSP gives you a few straightforward tools:

• C Fund (large U.S. stocks)

• S Fund (small/mid U.S. stocks)

• I Fund (international stocks)

• L Funds (like L 2035, L 2040, etc.) that already mix stocks and bonds in different proportions.

Choose one fund or L Fund to represent your inflation hedge bucket.

Keep the rest of your TSP in the mix that matches your usual risk tolerance and income needs.

The idea is that this bucket can reasonably aim for long-term growth above inflation, while the rest of your TSP and your FERS pension handle the day-to-day bills.

And remember…

Your pension and Social Security together already function like a large, guaranteed income stream.

That often gives a FERS retiree more flexibility to let a small portion of TSP stay in growth mode.

Turning the Concept Into a Simple Plan

“This makes sense… now what do I actually do?”

Here’s a straightforward, three-step checklist you can adapt:

1. Write down your pension number

• Look at your most recent retirement pay statement.

• Note your gross FERS pension (before withholding and insurance).

• Compute 1% of that amount — that’s your “per-1% shortfall” target.

Example: $36,000 pension → 1% = $360.

2. See where your TSP stands today

• Check your current TSP balance.

• Using the rule of thumb (25% of your pension per 1% shortfall), estimate the size of an inflation bucket that would feel comfortable.

Example: $36,000 pension:

• 1% shortfall → $360/year

• Hedge bucket ≈ $360 ÷ 0.04 (safe withdrawal rate) ≈ $9,000 principle

If your TSP is $300,000, dedicating $9,000 to this purpose is just 3% of your balance.

And that tiny portion should generate enough returns to cover COLA-related losses based on a $36,000 pension.

3. Assign a fund (or mix of funds) to the job

Decide which holding inside TSP will serve as your inflation hedge bucket.

Adjust that slice of your TSP to a growth-oriented but still diversified mix (for many retirees, that might mean an L Fund with a retirement date further out than their actual retirement year).

When diet COLA bites — or when premiums jump faster than your pension — give yourself breathing room by withdrawing a portion from this bucket.

Why This Matters Even if Congress Eventually Fixes Diet COLA

Reform could come. If it does, that’s great news.

But even in a world where FERS COLA is improved, the inflation hedge bucket still serves you:

• It can help handle healthcare inflation, which often runs ahead of headline COLA.

• It provides a flexible source for big purchases that you don’t want to fund entirely from your base pension.

• It adds another layer of resilience in years when markets are rough or tax rules change.

In other words, you’re not just patching a policy flaw.

You’re building a structure around your TSP that treats it as more than a big pot of money.

Using a slice of that TSP as an intentional inflation hedge is one concrete way to turn options into a plan.

Best,
—FWR