Some advice for navigating the maze of choices would-be retirees face.
I thought I would take a little time this week to address some recent reader questions and requests for help.
I can't be the only one overwhelmed with trying to find my way through the maze! My agency is rapidly losing experienced folks but not replacing them all, and the workloads have stressed more folks to move out of here at their earliest. I realize that's not unique, but I want to get out ASAP, too. Where do I turn for step-by-step help?
First of all, consider that you will have three sources of income in retirement and that income will have to be sufficient to pay your monthly living expenses. You'll also need some cash reserves to cover unexpected expenses. And you'll have to maintain health, life and possibly long-term care insurance.
The first source of income will be your federal retirement benefit, whether under the Civil Service Retirement System or the Federal Employees Retirement System (possibly in combination with a military retirement or private sector pension). The second will be a Social Security retirement benefit, if you qualify. The third will be investment income, from your Thrift Savings Plan, an individual retirement account or other savings.
Your agency can provide you with an estimate of your CSRS or FERS benefit, or you can do an estimate yourself. If you have attended a preretirement planning seminar, the computation of your federal retirement benefit no doubt was a subject of discussion. The Office of Personnel Management has more information on those calculations. You can get an estimate of Social Security benefits at the agency's website. And the TSP website has calculators to help you determine how to create a stream of income from your investments.
If you need help determining if you will have enough income to be able to retire, you may want to enlist the help of a financial adviser. Here is a list of questions to ask a potential financial adviser.
A friend is retiring from my office at the end of the year, with more than 30 years of service. He was CSRS, but switched over to FERS, so he gets the best of both systems. His financial adviser told him someone in the private sector would need investments totaling at least $2.5 million in order to take home as much money as he's going to be getting from his pension, Social Security supplement and TSP. Although most federal workers are now under just FERS, the lesson here is to start saving early, contribute as much as you can to the TSP and work as long as you can, in order to enjoy a comfortable retirement.
The FERS basic benefit is often underestimated in terms of the value that it adds to a federal employee's benefits package. Keep in mind that to generate $12,000 per year in income, it takes about $300,000, assuming that you can safely withdraw about 4 percent of your savings annually (allowing for an inflation adjustment).
Thirty years of service under FERS would provide a basic lifetime retirement benefit equal to 30 percent of your high-three average salary. The FERS benefit will provide a steady source of income that otherwise would have to come from savings and investments. Social Security also offers a steady source of lifetime income. Together, the FERS basic benefit and Social Security can provide a base of monthly income worth about two-thirds of pre-retirement income. (The percentage can be higher or lower, depending on how much service you have completed and your salary level.)
I am under CSRS Offset. I know when I turn 62 my CSRS benefit will be reduced by the amount of Social Security I would receive if I applied for benefits. I know that I don't have to apply for Social Security at that time. My question is, if I wait until say age 70 to apply, do I get the extra money, or do they just further reduce my CSRS pension?
The calculation of the offset to your CSRS benefit will occur at the time you are retired and qualified for Social Security benefits. Once this amount is computed, any further increases to your Social Security benefit based on additional work credit or the elimination of the reduction for applying before the full retirement age will not affect the amount of your CSRS benefit. It will be up to you to decide if you should apply for Social Security retirement at the same time as your CSRS benefit is subject to the offset. This will depend on whether you are going to continue working, whether you need the money and how long you think you might live. Here's more information from OPM.
My CSRS spouse is two years older than I am. (I'm under FERS.) Can she continue working to age 65 (or later) and claim spousal Social Security at 62 without any penalties due to the Windfall Elimination Provision or Government Pension Offset? Or could she quit working at 62, but delay retirement until 65 and work part time, and receive an unreduced Social Security benefit in the meantime?
If your wife is still working and is under the full Social Security retirement age (65 to 67, depending on her year of birth), there is an earnings limit that will reduce any Social Security benefit she is entitled to by $1 for every $2 she earns over the limit. (The limit for 2011 is $14,160.) This is the reason why half of Americans don't take their Social Security benefits at age 62. They're still working and earning more than the annual limit. If she is working and over the full retirement age, then she would be able to receive her own Social Security benefit (or the one that you've earned for her, if higher) regardless of how much she is earning.
The WEP will affect your wife's earned Social Security benefit if she has worked long enough to qualify for Social Security on her own. If she is receiving her CSRS retirement benefit, this will cause her Social Security benefit to be computed under the modified WEP formula. The GPO will affect your wife's ability to collect the Social Security benefit you have earned for her. That benefit will be offset by two-thirds of her CSRS retirement. If she is working past her full Social Security age and is not receiving her CSRS benefit, then the WEP and GPO will not apply.
When will we learn whether retirement computations will be based on the high-three average salary or high five? If the change is made, how long will it take to go into effect? And will we have adequate time to put in a retirement request to lock in the high three?
Any changes to the retirement benefits for federal employees most likely will be recommended by the congressional super committee on deficit reduction that recently was appointed. The cuts that will come out of this committee are yet to be seen. Any changes to government retirement benefits will require a change in federal law, so after any recommendations are made, Congress will have to take action to approve the changes, and the president will have to sign them into law. So the short answer is, it's just too soon to tell what might or might not happen.
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 Mondays at 10 a.m. EDT on federalnewsradio.com, or on WFED AM 1500 in the Washington-metro area.