How to account for a teacher pension COLA shortfall in your retirement plan

A COLA means my pension keeps up with prices

Your pension COLA type determines whether your check stays level with inflation or falls behind. Some plans tie raises to the Consumer Price Index and compound them every year (full inflation protection). Others cap raises at a set percentage—often 2% or 3%—so the protection weakens over time. Some raise the original benefit amount by a flat percentage each year (simple interest, not compounding), which widens the gap after each raise. Many districts and states now pay ad hoc COLAs only when a board or legislature votes one, which can pause for years. And some pensions have no COLA at all. Your plan handbook or your most recent annual benefit statement tells you which rule applies.

Here's a fast way to see whether the gap matters: divide 72 by the yearly difference between the inflation you assume and your pension's COLA rate. That gives you roughly how many years until your check buys half as much. If your state offers 2% compound COLA and you assume 3% inflation, the gap is 1%. Divide 72 by 1 and you get 36 years until the pension buys half. If the gap is 2%, it takes 24 years. At 3% gap, 18 years. That's the Rule of 72 applied to inflation erosion.

Simple COLAs widen the gap faster than compound ones. Say your $4,000 monthly pension gets a simple 2% raise: after ten raises it pays $4,800 ($4,000 plus ten times $80). With compound 2% raises, after ten years it pays about $4,876 ($4,000 times 1.02 to the 10th power, or about 1.219). The difference seems small at first, but by year 20 a simple COLA leaves you hundreds of dollars a month behind. Ask your plan administrator which rule your pension uses.

As a practical matter, if your pension covers more than half of your annual spending and your COLA is ad hoc or capped below the inflation you expect, you'll need a plan for the gap. If the pension covers less than a quarter of your spending, inflation usually makes less difference because a diversified portfolio covering the rest tends to keep pace. Harbourfront Wealth Management starts by asking what share the pension covers.

Losing a little buying power each year won't add up to much

Rick and Esther show how the gap actually works. (hypothetical, round numbers) Rick is 63 and retired as a district transportation supervisor with a pension of $4,000 a month. The district raises the pension only when the legislature votes an ad hoc increase, so there's no automatic COLA. Esther is 61, still working as a middle-school librarian, and the couple has about $900,000 in 457(b) and rollover IRA money.

Assuming 3% inflation for illustration, prices roughly double in 24 years. The formula is simple: 1.03 to the 24th power equals about 2.03. So at age 87, Rick's $4,000 check buys what costs about $8,120 today. The shortfall is $4,120 a month. But that gap starts at zero and grows every year, so the average shortfall is roughly half: about $2,000 a month in future dollars, or about $1,000 a month in today's dollars. Over 24 years, $1,000 a month adds up to $288,000 in today's dollars ($12,000 a year times 24 years). The actual compound figure is a bit higher—closer to $315,000—so $288,000 is the conservative floor.

The mistake retirees often make is entering the pension in a generic retirement calculator as 'guaranteed income' that grows with inflation by default. The software assumes Rick's $4,000 payment grows with inflation every year, so by 87 it shows $8,130 a month instead of the $4,000 the plan actually pays. That overstates his income by $4,130 a month, and the $288,000 gap vanishes from the plan entirely. When the pension raises only come by vote, or are capped below inflation, the calculator's assumption is flat wrong.

Because Rick's gap money would come from his 457(b) and rollover IRA—both pre-tax—each dollar he draws counts as ordinary income in that year and adds to his Modified Adjusted Gross Income (MAGI), which Medicare uses two years later to set the income-related premium surcharge. At a combined tax rate of about 20% for illustration, drawing $12,000 a year from pre-tax accounts actually takes a $15,000 withdrawal ($12,000 divided by 0.8). That's the cost of the gap in tax terms.

Before Harbourfront Wealth Management suggests an inflation-protected bond fund for the gap reserve, it checks the fund's expense ratio. A 0.05% expense ratio fund on $288,000 costs $144 a year, while a 0.5% fund on the same amount costs $1,440—nearly ten times more. Holding inflation-protected Treasury securities (TIPS) inside the 457(b) or rollover IRA makes more sense because the annual inflation adjustment isn't taxed as income the way it is in a taxable account. Investments can lose value, and you may get back less than you set aside, so the reserve itself should be invested conservatively.

The COLA I retired with is locked in for life

Your pension's COLA formula is set when you retire, and it doesn't change unless your state changes the law. But the law does change. In the past decade, several states have capped, suspended or cut COLAs for people already retired as part of pension system funding repairs. Congress also repealed the Windfall Elimination Provision and the Government Pension Offset, which used to reduce Social Security for many teachers with pensions—a change that added real income for those affected. SECURE 2.0 pushed the age when Required Minimum Distributions start from 72 to 73, and to 75 for anyone born in 1960 or later.

If you built a retirement projection before any of these changes, it should be recalculated. An old plan that assumed a generous COLA, a WEP-reduced Social Security benefit, or RMDs starting at 72 will overstate your income under today's rules. Harbourfront Wealth Management updates the projection with current law before evaluating whether savings will last.

When do the COLA, tax and Medicare dates fall for us?

The calendar drives the numbers. Your 1099-R for pension income arrives by January 31, and you'll need it to file taxes. Social Security sends its annual COLA notice to beneficiaries in October, and the increase (2.8% for 2026 benefits) lands in January checks.

Your pension's own COLA raises take effect on a date set by your plan—often January 1 or July 1—and the handbook tells you which. The IRS deadline for completing a Roth conversion is December 31 of that year. After your first year of retirement, RMDs (or at least some of them) come due on December 31, which is also the deadline to complete a withdrawal from any account.

The income you earn or withdraw in one year determines your Medicare premium in two years. The Medicare Part B standard premium for 2026 is $202.90 a month, but if your Modified Adjusted Gross Income two years earlier exceeds certain thresholds, the premium rises. For a married couple filing jointly in 2026, the first higher tier starts at $218,001 of combined 2024 income. That income includes pension payments, Social Security benefits, pension COLA raises, and any 457(b) or IRA withdrawals.

Rick and Esther's calendar looks like this: Rick was born around 1963, so he'll turn 65 in about 2028, and his Medicare coverage begins. Esther was born around 1965. Because both were born in 1960 or later, their Required Minimum Distributions don't start until age 75, which gives them a dozen years to decide how much to withdraw from the 457(b) and rollover IRA before the government forces them to. Social Security, if either spouse claims it, carries a full CPI COLA (the same 2.8% for 2026), so the claiming age decides how much of their total income is automatically inflation-protected. The claiming decision itself is its own page; the key point is that Social Security COLA is full, so it offsets part of Rick's pension gap if they claim it early.

Rick and Esther should look at the actual COLA dates in Rick's plan and confirm them with the pension office. Dates matter because a COLA raise that arrives partway through a year affects that year's income and next year's Medicare premium—a detail easy to miss.

Talk it over with the spouse likely to outlive the pension

In a household like Rick and Esther's, the younger spouse usually raises the COLA question first. Esther still works and will likely outlive Rick's pension check. If Rick dies, his survivor benefit (set at retirement) keeps the same COLA rules Esther chose at the start. A pension that loses buying power harms Rick while he's alive, but it harms Esther more if she lives another 30 years on the survivor benefit. So Esther is often the one who says, 'Do we have enough for this?'

Sit down with three things in front of you: the COLA page from the plan handbook, this month's grocery receipt, and last year's pension statement. Compare what the pension paid a year ago to what it pays now—see whether a COLA actually arrived. Then check the plan handbook for when the next COLA can happen and what triggers it. Finally, talk about what a dollar buys today versus what it bought when you retired. That conversation anchors the gap in real life instead of leaving it abstract.

What would Harbourfront Wealth Management check first in our pension?

Harbourfront Wealth Management reads the COLA clause in the plan handbook first—whether it's capped, simple, compound, ad hoc or nonexistent—and then works out what share of your annual household spending the pension covers. If the pension pays 60% of spending and has an ad hoc COLA, the gap is real.

If it pays 15% and has a 2% cap, a separate reserve often isn't necessary because a diversified portfolio covers the rest. Then Harbourfront Wealth Management looks at where the gap money would come from (pre-tax 457(b), Roth, taxable account), because the account location and tax rate determine the true cost of filling the gap each year. Finally, it checks the expense ratio and structure of any fund earmarked for that purpose, because fund costs compound over decades and they're one of the few expenses you control.