July 9, 2010For the past few weeks, we've been looking at the Thrift Savings Plan and the role it plays in planning for a comfortable retirement, especially for those under the Federal Employees Retirement System. Not surprisingly, those columns generated a lot of comments. After reading the responses, I wanted to share some final observations.
First, apparently some folks still aren't aware that that FERS has a lifetime retirement benefit in addition to the TSP and Social Security. The FERS basic benefit is computed according to the following formula:
1% x years and months of federal service x high-three average salary
(The initial percentage is 1.1 percent for those retiring at 62 or later with 20 or more years of service.)
So, for an employee with 35 years of service, the FERS basic benefit would be worth 35 percent of the average of the highest three years of basic pay. An employee under the Civil Service Retirement System would get more than 66 percent of his or her high-three for the same years of service. A FERS employee would have to come up with a little more than 31 percent of his or her high-three from Social Security and the TSP to match the CSRS worker's benefit. That may sound like a lot, but it wouldn't take a $1 million balance in the TSP to do it -- unless your high-three is $200,000!
The comments on the previous columns indicate there are still a lot of hard feelings from FERS employees who feel that those under CSRS will have a better retirement than they do. I'll admit that retirement income is harder to predict under FERS because of the role the TSP plays. But it is entirely possible to a comfortable retirement based on the FERS basic benefit, the TSP and Social Security. The key is to understand how the retirement system you're in works so you'll be able to achieve your goals.
What You Need, Where You Can Get It
If you need to replace 20 percent of your wages to be able to live comfortably in retirement (in addition to your FERS basic benefit and Social Security), keep in mind that 20 percent your salary is different than 20 percent of someone else's pay. To replace 20 percent of $100,000, you'd need an investment of about $500,000. To replace 20 percent of $50,000, you'd need an investment of about $250,000. (This assumption is based on withdrawing about 4 percent a year from a diversified set of investments.) When it comes to Social Security, many people don't seem to understand that the program is a form of social insurance. Everyone pays the same percentage of pay (up to a maximum) into the system, but not everyone gets the same benefit. For employees with a lifetime of average (or below average) wages, Social Security will replace 30 percent to 40 percent of pre-retirement income. But those with salaries in the $100,000 range will get a benefit replacing only 25 percent or less of their pre-retirement salary. Here's a fact sheet on how Social Security benefits are computed.
Many people blame their low TSP balances on the fact that they can no longer make daily interfund transfers. But studies have shown that trying to time the market actually results in poorer performance than sticking with an asset allocation and occasionally rebalancing your investments between stocks, bonds, and cash. The best idea is to shift from more aggressive investments to more conservative ones as your retirement horizon approaches.
Baylor University finance professor William Reichenstein told Money magazine earlier this year that investors shouldn't vary their allocations by more than 10 percentage points in either direction. In other words, if you generally have 50 percent of your funds in stocks, go as high as 60 percent when they look like a bargain and down to 40 percent when they seem expensive. But don't change your investments on a whim -- only when there are significant changes in market conditions. Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.
For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.
July 9, 2010