Only You Can Ensure a Comfortable Retirement

How do you perceive your retirement preparedness? Does it match with reality? Will you be able to maintain your standard of living in retirement?

These are all important questions to consider as you plan for your retirement from federal service. According to a recent report from the Center for Retirement Research at Boston College, almost half of today’s working-age households will not be able to maintain their pre-retirement standard of living after they retire.

Most people need to replace between 65% and 85% of their pre-retirement income to be financially secure in retirement. Take a look at the net income you take home each pay period. Will you really need less than this amount to live comfortably when you stop working? The only withholdings that come out of your paycheck that won’t come out of your retirement benefit will be payroll taxes (FICA and Medicare), Thrift Savings Plan contributions, and retirement contributions. You will continue to pay most insurance premiums and federal and possibly state income tax, depending on where you live.

The Center for Retirement Research report highlights the implications of an important trend: Do-it-yourself retirement is replacing employer sponsored pension benefits. In government, the three-tiered Federal Employees Retirement System—with a defined pension benefit, Social Security and a defined contribution benefit in the form of the Thrift Savings Plan—has replaced the single-benefit Civil Service Retirement System. Over the last 40 years, retirement systems in the private sector have undergone a similar shift, from defined benefit plans to defined contribution plans, primarily 401(k)s and individual retirement accounts.

This shift requires more from workers, including:

A better understanding of how to manage a retirement savings and investment plan. Federal employees can educate themselves on the TSP through agency presentations and online training via the TSP website and YouTube channel channel. 

A higher level of employee contributions to ensure a comfortable retirement, especially for higher wage earners. CSRS provided employees with a 56.25 percent replacement of income after a 30-year career. Under FERS, 30 years of service will get you 30 percent of your high-three average salary. The remaining 26.25 percent must come from Social Security and TSP savings. 

Federal employees who were hired in 2013 and later also must contribute more to their FERS Basic retirement benefit. The FERS Revised Annuity Employee system covers employees hired in 2013 and the FERS Further Revised Annuity Employee system covers those hired in 2014 and later. This is in addition to TSP contributions and the 6.2% FICA tax on wages up to the maximum taxable wage amount ($160,200 for 2023).

More time thinking about retirement. FERS-covered workers must start to plan for retirement from the day they are hired. To begin with, they should commit to saving at least the minimum amount in the TSP to get agency matching funds. The TSP provides a 1% percent automatic agency contribution for all FERS employees, along with matching funds totaling 5% of salary for employees who contribute their own 5% of basic pay.

Federal workers also must consider that it takes a FERS employee longer to become eligible for an unreduced retirement benefit, because the minimum retirement age has increased from 55 under CSRS to 57 for employees born in 1970 or later. The service requirement for retirement at the youngest age has remained 30 years. In addition, FERS offers a reduced benefit at the minimum retirement age with as little as 10 years of service. Those employees who came into federal service later in life can also retire with 20 years or more service at age 60 or 5 or more years at age 62 with no age reduction.

More risk. Since the inception of the TSP’s original three funds—the G Fund, C Fund, and F Fund—the G Fund has returned 4.66%, the F Fund 5.37%, and the C Fund 10.55% These funds vary from low to medium risk. In 2001, the TSP added the S Fund (medium-high risk) and I Fund (high risk), which have returned 8.34% and 4.72%.

Getting started early with saving for retirement is critical, to take advantage of compound growth. Otherwise, the only solution is to work longer.