What would you do if you never earned another pay raise?

  1. Would your standard of living decline?
  2. Would you take a part-time job?
  3. Would you leverage your savings?

Inflation increases the prices of everyday goods and services. This in turn increases the "Cost of Living". Your employer may offer a "Cost of Living Adjustment" (COLA) to your salary or pension. Usually, this means that your employer automatically increases your salary or pension by a certain amount, such as the Consumer Price Index. This increase may be mandatory or optional. Recently, according to the US Department of Labor, the cost of living has increased:

US DOL Inflation Index*
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Percent increase
3.4
2.8
1.6
2.3
2.7
3.4
3.2
2.8
3.8
-.4
1.6
3.2
2.1

During 2005, (highlighted above) prices rose an average of 3.4%. Assuming your salary did not increase, your buying power dropped. In other words, if your salary was $35,000, after inflation it was really only worth $33,810. A decrease in spending power by $1,190.

Wouldn't it be better to offset that loss?

Using a deferred compensation plan is a good way to offset a decreasing standard of living due to no COLA or a partial COLA from a defined benefit pension. Follow the steps below to see how long an investor's retirement investments could last if used to provide cost of living increases.

Inputs
Step 1) Enter yearly pension amount. This will not include or account for any increases provided by the defined benefit plan.
$
Step 2) Enter a hypothetical deferred compensation balance at retirement. This balance could also include investor DROP or 401(a) assets, which can be combined with an investor's deferred compensation account when they retire. Assets rolled over from a qualified plan or individual retirement account may be subject to a 10% tax penalty if withdrawn prior to age 59½.
$
Step 3) Based on the above example enter a "cost of living" or inflation index.
%
Step 4) Enter a hypothetical rate of return for the deferred compensation account.
%
Step 5) Click enter.

Investing involves market risk, including the possible loss of principal. Actual investment returns and income streams may be more or less than those assumed here. All illustrations are estimates only and may vary from actual results.

*Source: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

Nationwide Retirement Solutions (Nationwide) makes payments to the International Association of Fire Fighters – Financial Corporation (IAFF-FC) for services and endorsements that IAFF performs generally for all its members related to Nationwide’s products and services sold exclusively in public sector retirement markets. More detail about these payments is available at www.nrsforu.com.

Form Number NRW-1309AO.3