You Can Afford To Retire!

By Tammy Flanagan

March 3, 2006

Even some federal employees who have met the age and service requirements for retirement after a full career don't know whether they can afford to retire. No matter what career stage you're in, it makes sense to improve your financial literacy and evaluate your retirement readiness.

Some financial planners use a replacement rate of 70 percent to 80 percent of pre-retirement income as a guide for an affordable retirement. You may have more confidence in planning for life after government if you can visualize how much of your pre-retirement income you will have.

Solution

Comparing your salary to your projected retirement income can be a liberating and revealing exercise. You may find out that retirement is more affordable than you think.

Even if you haven't worked in government for 40 years and don't have $1 million in your Thrift Savings Plan account, you can still have a very comfortable retirement.

To gauge your projected income, you will need the following documents (see the Resources section below to learn how to obtain them):

Use this information to help complete the worksheet below (click here for a printable version).

Note: Multiply biweekly numbers on your leave and earnings statement by 26 and monthly numbers on your retirement estimate by 12.

Annual Pre-Retirement Income Annual Retirement Income
Basic Salary (with locality) Estimated Retirement
Overtime + Age Reduction(1)
Bonus + Unpaid Deposit Reduction (1) -
CSRS Offset Reduction (1)
Survivor Election (1) -
FERS Supplement (2) +
Reduced Retirement
Federal Taxes
State Taxes (3) -
Health Insurance (FEHB) -
Life Insurance (FEGLI) -
Federal Taxes - Other Withholdings -
State Taxes -
Life Insurance (FEGLI) -
Long-Term Care Insurance -
Retirement Contribution -
Flexible Spending Account -
Other Withholdings -
NET INCOME NET RETIREMENT
Social Security Income (4)* +
Other Pensions * +
Other Investment Income* +
Post-Retirement Work* +
  1. Your retirement could be reduced for early retirement, civilian or military service credit unpaid deposits, CSRS Offset and survivor benefit reductions. These numbers can be computed on a retirement estimate prepared by your agency's benefits office.
  2. The FERS Supplement is not payable if you are going to work and earn substantial income after retirement (in 2006, the supplement is reduced by $1 for every $2 that you earn over $12,480). If you are retiring at age 62 or later, the supplement is not payable. MRA+10 and deferred retirements are not eligible for the supplement.
  3. Depending on the state you live in when you retire, you may not need to pay state income tax or some of your retirement income may be exempt from state income tax.
  4. Social Security retirement is payable at age 62 or later. Up to 85 percent of your Social Security benefit may be taxable. In some cases, your spouse (current, former or deceased) may provide Social Security benefits that could be higher than your own.Social Security will assist you to determine the most advantageous benefit.
  5. Go to the TSP Web site to explore various withdrawal options. Calculators are available for monthly payout options as well as the annuity option.

  6. * Use income after deductions for taxes and other withholdings.

Here's how the form might look if filled out by a FERS employee who has 34 years of service (22 federal and 12 private sector) and is 56 years old:

Annual Pre-Retirement Income Annual Retirement Income
Basic Salary (with locality) $85,000 Estimated Retirement $17,765
Overtime + $0 Age Reduction(1) - $0
Bonus + $0 Deposit / Redeposit Reduction (1) - $0
Survivor Election (1) - $1,776
CSRS Offset reduction (1)
Former Spouse Court Order Award - $0
FERS Supplement (2) + $8,448
Total Income: $85,000 Reduced Retirement $24,437
Health Insurance (FEHB) - $3,525 Federal Taxes - $5,376
Social Security Tax (FICA) - $5,051 State Taxes (3) - $0
Medicare Tax (HIT) - $1,181 Health Insurance (FEHB) - $3,525
Thrift Savings Plan - $15,000 Life Insurance (FEGLI) - $339
Federal Taxes - $14,052 Long Term Care Insurance - $1,200
State Taxes - $3,193 Other Withholdings
Life Insurance (FEGLI) - $339
Long Term Care Insurance - $1,200
Retirement Contribution - $680
Flexible Spending Account - $2,600
Other Withholdings - $0
NET INCOME: $38,179 NET RETIREMENT: $13,997
Social Security Income (4) $0
TSP Income (5) $10,000
Other Pensions * $0
Other Investment Income* $7,000
Post-Retirement Work* $12,000
Net Income $38,179 Net Retirement $42,997

Here's another example, of a CSRS employee who has 34 years of service and is 55 years old:

Annual Pre-Retirement Income Annual Retirement Income
Basic Salary (with locality) $85,000 Estimated Retirement $51,881
Overtime + $0 Age Reduction(1) - $0
Bonus + $0 Deposit / Redeposit Reduction (1) - $372
Survivor Election (1) - $4,880
Former Spouse Court Order Award - $0
FERS Supplement (2) + $0
Total Income: $85,000 Reduced Retirement $46,629
Health Insurance (FEHB) - $3,525 Federal Taxes - $9,745
Social Security Tax (FICA) - $0 State Taxes (3) - $0
Medicare Tax (HIT) - $1,181 Health Insurance (FEHB) - $3,525
Thrift Savings Plan - $8,500 Life Insurance (FEGLI) - $339
Federal Taxes - $15,482 Long Term Care Insurance - $1,200
State Taxes - $3,648 Other Withholdings
Life Insurance (FEGLI) - $339
Long Term Care Insurance - $1,200
Retirement Contribution - $5,950
Flexible Spending Account - $2,600
Other Withholdings - $0
NET INCOME: $42,575 NET RETIREMENT: $31,820
Social Security Income (4)* $0
TSP Income (5)* $5,000
Other Pensions* $0
Other Investment Income* $0
Post-Retirement Work* $12,000
Net Income $42,575 Net Retirement $48,820

So what does all of this mean?

The "net" numbers in the examples above may look almost too good to be true. Remember, they represent employees who got used to living on less by saving for retirement in the TSP plan or other retirement savings program. If you haven't invested much prior to retirement, your numbers may not look as good, and you might need to work longer to accumulate enough wealth to retire. Many factors will determine your retirement readiness. Understanding the value of your benefits is the first step in planning for your retirement.

Resources

Checklist Follow Up

Take the steps necessary to understand and compare your pre-retirement and post-retirement income. It's a worthwhile investment of your time.


By Tammy Flanagan

March 3, 2006

http://www.govexec.com/pay-benefits/retirement-planning/2006/03/you-can-afford-to-retire/21269/