Cliff Divers, Worker Bees and Retirees in Training

By Tammy Flanagan

March 8, 2013

I recently received an email with this unusual question: “Should I stop/reduce contributing to my Thrift Savings Plan because I am 65?”

The emailer referred to a recent column in the Wall Street Journal by Carolyn T. Geer, entitled “How to Get to Retirement? Practice!,” noting that in it an expert had offered the opinion that contributions to 401(k) plans are the “least important” piece of the retirement puzzle for people in their 60s.

That expert, Christine Fahlund, vice president and senior financial planner at T. Rowe Price Group, describes three kinds of retirees:

Make Your Choice

Fahlund says the type of retiree you choose to be can have a big impact on how much money you will have. Cliff divers, for example, need to manage on the money they were able to save during their careers, and plan for a long period of retirement.

The good news for federal employees is that they will have a lifelong retirement benefit under both the Civil Service Retirement System and the Federal Employees Retirement System that includes cost-of-living adjustments. Because CSRS was designed to be a single-benefit retirement plan, I would guess most cliff divers in the federal sector are covered under CSRS.

For FERS employees, the basic retirement benefit is about half the value of the CSRS benefit, but it is designed to be complemented by Social Security and Thrift Savings Plan investments. FERS employees must focus more intently on how long they need to make their TSP savings last. I predict there will be more worker bees under FERS than under CSRS.

Frahlund says that for the third group of people, retirees in training, contributions to retirement savings in their 60s are the least important aspect of assembling a nest egg. Since there’s less time for returns to compound, she says would-be retirees should consider contributing only enough to qualify for employer matching contributions. If they have extra money, they can use it to pay off a mortgage or make home improvements -- in other words, to get their financial house in order and start enjoying the life they envision in retirement.

The Value of Savings

This is where I disagree. I think that employees should maximize their retirement savings in their last years of employment. Here are the reasons I suggest not cutting back on TSP contributions:

I know someone who has saved $227,000 since 2006 by contributing the maximum to the TSP as a FERS employee working in a second, post-government, career. I recommend continuing to save as much of your salary as you can while you are still employed, because I’ve never heard a retiree complain about having too much money in retirement.

By Tammy Flanagan

March 8, 2013