Thrift savings plan TSP written on a piggy bank.

Thrift savings plan TSP written on a piggy bank. Courtesy Joint Base San Antonio

Retirement Myth Busting

A look at some common misperceptions.

There are some widely held beliefs about federal retirement that simply aren’t true. These ideas can lead federal employees down a dangerous path when it comes to making key retirement planning decisions. Sometimes there’s enough fact in a myth to make it believable, or it may have been passed around so much that it appears to be based on solid evidence.

Let’s take a look at some of the common myths I’ve encountered.

Myth No. 1: Before you can retire, you need to have at least $____ saved.

Fill in the blank with any dollar amount. I’ve heard them all. In reality, the amount you need to have saved for your retirement depends on the answers to a number of questions, including:

  • How much will you spend on a monthly basis? How much do you currently spend? Will that change?
  • If you’re married or have a partner, are they still working? When do they plan to retire? How much net income will they receive in their retirement? Do they have a pension benefit, retirement savings and entitlement to Social Security?
  • Have you tried to estimate your monthly net income from your federal retirement benefit? Don’t forget to account for taxes, insurance and reductions for survivor benefits, unpaid deposits, former spouse entitlement or other applicable factors.
  • How old will you be when you claim Social Security retirement? If you claim Social Security at 62, rather than waiting until your full retirement age, you can expect up to a 30% reduction in monthly benefits. For every year you delay past your full retirement age up until you’re 70, you get an 8% increase in your benefit. 
  • How are you investing your retirement savings? Pick your asset allocation among the Thrift Savings Plan’s stock, bond and cash options carefully. Look at the TSP’s L Funds for an idea of how to diversify your investments.

Try using the Federal Ballpark Estimate calculator to help you figure out how much you need to save for a comfortable retirement.

Myth No. 2: Retirees need 70% to 80% of their current income in retirement.

What does this mean? Is it based on your gross income or net? Does it take into account your age at retirement? What if your mortgage is paid off and your kids are launched and independent? What if you’re moving to a lower (or higher) cost of living area? Income percentages like this are rules of thumb, and subject to interpretation on many levels. 

Try this exercise: Convert your biweekly salary to a monthly amount by multiplying your net salary by 26 pay periods and then dividing by 12. How much of your net income do you generally spend? If the answer is “all of it,” then you might need at least this much income in retirement. While you’ll no longer incur the costs of commuting to work  or buying lunch at the cafeteria, you’ll have a lot of free time every week to spend money on other things.

Now estimate your monthly retirement benefit income. But remember:

  • There may be reductions for such things as survivor benefits, former spouse apportionments and unpaid civilian service credit deposits.
  • Federal Employees Retirement System retirees may be entitled to a FERS supplement.
  • Potential withholdings from federal retirement benefits include federal income tax, state income tax and insurance.

Next, estimate your Social Security retirement benefit if you’re eligible for it and plan to claim it at retirement. Don’t forget to allow for taxes. If you will be 65 or older, also allow for Medicare Part B premiums

Now you might want to use the TSP Payment and Annuity Calculator to see how much gross income you can generate from your savings. Don’t forget to subtract federal and state income taxes from your traditional TSP withdrawals.

At the end of this process, it’s up to you to assess whether the total amount of income you can expect will sustain you in retirement.

Myth No. 3: Maxing out your Thrift Savings Plan is all you need to do to save for retirement.

Emergencies and unexpected expenses come up for retirees as they do for employees. Having emergency savings in retirement is especially useful if you don't want to tap your nest egg to pay for unexpected costs. Most experts recommend having three to six months' worth of emergency savings during your working years. But in retirement, you may want to increase that to 12 or even 18 months’ worth.

Also, remember that stock market downturns can occur during your retirement years, too. During those times, it’s good to have another place to withdraw from besides whatever portion of your retirement savings are in stock funds.

Myth No. 4: At retirement, your investments should become very conservative.

In my work, I see employees and retirees alike who believe they’re protecting their retirement savings by investing 100 percent of their money in the G Fund or putting it all in stock funds. I’m not a certified financial planner, so when I see behavior that appears either too conservative or too aggressive based on the age and retirement stage of the individual, I generally recommend they consult with a qualified and trusted financial adviser.

It’s important to have a plan for your money. For example, let’s say you had $500,000 in your TSP on Dec. 31, 2019, and it was invested 50 percent in the C Fund, 30 percent in the S Fund and 20 percent in the I Fund. By the end of March, your account would have lost $114,042 in value and your balance would have been $385,957. If you panicked and moved everything to the G Fund, then by the end of May you would have regained only $502 of your losses. But if you had simply left your investments alone, your balance at the end of May would have grown to $459,180 and you would only be down $40,820 for the year. The lesson: Make a plan and stick to it.

These are just a few myths regarding federal retirement. Next week, we’ll look at a few more.