How to figure out what you’ll really need.
Do you know how much you will have to save to retire comfortably? Have you set a goal for retirement? Or are you flying by the seat of your pants?
Last week, I wrote about planning for retirement from early in your career. Here’s a comment I received from a reader about that column:
Another suggestion that I didn't think of until a couple of years ago is to assess what your retirement plans are and how much money you need to meet those goals. Otherwise, you read that you need X precent of your salary in retirement or look at numbers that don't have a lot of meaning, all of which can feel overwhelming. We were pleasantly surprised when meeting with a financial planner how much we would actually need to meet our retirement goals. We moved our Thrift Savings Plan balance to a more aggressive life-cycle fund because we won't need it for seven to 10 years after retirement.
Retirement planning can be downright scary, especially for those who are closing in on retirement eligibility. Sometimes, people are told they need $1 million or more saved to retire comfortably. I have no idea where that number came from.
In reality, your planning should be based on your individual goals. So how do you go about setting them, especially early in your career? Here are eight tips for those under the Federal Employees Retirement System.
1. Get a fundamental understanding of the three legs of the FERS stool: your basic retirement benefit, your Social Security benefit and your TSP returns. To begin, visit the websites of the Office of Personnel Management, the Social Security Administration and the TSP.
2. Decide when you want to retire and begin to project how much replacement income you will have from the three parts of FERS when you reach that date. If it turns out your projected date isn’t realistic, then you must be willing to work longer or to have a second career to achieve your retirement goal. 3. Remember that as a rule of thumb, your FERS benefit will replace 1 percent of your preretirement income for every year you serve in the government. It will be a little more if you retire past age 62. But keep in mind this benefit can be reduced in certain ways, such as by providing for a spousal survivor’s benefit.
4. Social Security retirement, in many cases, will be the smallest piece of your retirement pie. Also, the age you apply for Social Security will have an impact on how much of your preretirement income will be replaced. At 62, Social Security benefits are reduced by 30 percent if your full retirement age is 67.
5. Keep in mind that if you plan to retire younger than 62, FERS provides a supplement to take the place of Social Security until you turn 62. In today’s dollars, the supplement replaces about $40 a month for every year you’ve worked under FERS. (Assuming, of course, Congress doesn’t eliminate the benefit.)
6. For figuring how TSP investments will factor in to your retirement income, assume you will be able to withdraw roughly 4 percent of your balance after you retire without depleting the money in less than 30 years.
7. Remember your insurance needs in the planning process. They will change over the course of your life. For example, with health insurance, you may shift from needing more preventive care to requiring coverage for serious or chronic health problems. Your life insurance requirements may decrease as your children become independent and your mortgage is paid down. Long-term care insurance may become more important as you age.
8. Be willing to adjust your expectations along the way, because life has a way of throwing you curveballs. What if the return on your investments isn’t as high as you were expecting? What if your kids need extra assistance with education or other expenses? You must be ready to reevaluate your goals from time to time.
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