A Case of Savings Envy

By Tammy Flanagan

January 24, 2014

When it comes to retirement readiness, it generally doesn’t pay to compare yourself to other people. It can lead to unnecessary disappointment -- or unwarranted joy.

This week I had a casual conversation with “Heather” about how disappointed her aunt, “Brenda,” was when the two of them compared Thrift Savings Plan balances. But a look at the bigger picture shows they are simply in very different stages of the retirement planning process.

Here’s Heather’s situation:

Here’s Brenda’s situation:

Brenda had an intense and emotional reaction to realizing how far behind she was in retirement savings compared to her niece. She thought she might never be able to afford to retire. To help Brenda see she wasn’t as bad off as she imagined, I walked her through the process of understanding where she is now and where she can be five years down the road.

Estimated Retirement Income at 57:

Brenda will be eligible to retire in 2014 because she will have 30 years of federal service and is already past the FERS minimum retirement age. I recommended that Brenda request a formal retirement estimate from her human resources office. In the meantime, we did a quick estimate based on a high-three average salary of about $55,000.

FERS Benefit:

Social Security: Not payable at age 57; replaced by FERS Supplement (see above).

TSP: I asked Brenda how she came up with the 50-50 split in her allocation between the G and F funds, and she said she couldn’t remember. I suggested she might want to speak with a financial adviser or consider the Lifecycle Funds to get exposure to all five TSP investment options. Then, using the TSP’s Retirement Income Calculator, Brenda ran different scenarios involving various monthly payments based on a set dollar amount as well as a life expectancy payout using her current age and balance:

If Brenda chose Option One, she could theoretically get $7,200 per year in TSP income in addition to her FERS retirement benefit of $27,300, for a total retirement income of $34,500. That’s about 56 percent of her current salary. Based on her current debt and expenses, Brenda thinks she’ll need to work longer to be able to afford to retire on less than her current salary. But she was relieved to realize that she wasn’t as financially unprepared as she thought she was.

Here’s what happened when we re-ran the numbers by extending Brenda’s career another five years:

Estimated Retirement Income at 62:

Brenda will be eligible to receive Social Security retirement at 62, although it would be reduced by 25 percent of the amount payable at 66, since she’s under her full retirement age. By working five years beyond her first eligibility, Brenda also would be eligible for a more substantial FERS basic retirement benefit -- with cost of living adjustments payable in the first year. Five more years of saving in the TSP and working on reducing her debt will also go a long way towards better financial security in retirement. Brenda also believes she can afford to increase the amount she is saving in the TSP to more than her current 5 percent of basic pay.

FERS Basic Retirement Benefit: 35 years of service  x 1.1% (must be age 62 with at least 20 years of service to use the 1.1% factor) x $61,234 (current salary) = $23,575

Social Security: At her current salary projected to age 62, Brenda would receive a Social Security benefit of approximately $1,200 a month or $14,400 a year.

TSP: If Brenda increases her savings from 5 percent to 6 percent of her basic pay, and if she can get an average return of 6 percent on her current and future savings, her TSP balance will grow to $232,877 by age 62. If her savings only grow an average of 4 percent, the balance would be $212,552. If she could increase her savings to 8 percent of her basic pay, with a 4 percent rate of return, her balance would be $219,325. If she could earn a 6 percent return, the balance would grow to $240,007.

Using the TSP’s calculator, Brenda ran a variety of different scenarios of withdrawing a series of monthly payments based on a set dollar amount as well as using the option for a life expectancy payout based on beginning payments at 62 with a balance of $210,000.      

Using the life expectancy TSP option, Brenda’s retirement income at 62 would total $46,903, representing 77 percent of her current salary. For the first time, she might feel financially comfortable to retire.

Of course, there are benefits to working beyond 62:

The bottom line for Brenda is that it will pay to wait, and she’s well within reach of a financially stable retirement. 

(Image via Monkik/Shutterstock.com)

By Tammy Flanagan

January 24, 2014