How Much Money Do You Need to Retire?

By Tammy Flanagan

June 28, 2013

For many years, magazines, newspapers and other media have promoted a rule of thumb for retirement planning: To retire comfortably, you must be able to replace 80 percent of your pre-retirement income. Over my years of teaching pre-retirement classes, I’ve observed that many employees are closer to the 80 percent threshold than they think, once they add up all of their sources of retirement income.

The 80 percent figure stems from "replacement ratio" studies conducted by Aon Consulting and Georgia State University for 20 years, in which researchers cull data from the Bureau of Labor Statistics Consumer Expenditures Survey, which details how U.S. consumers, including older households, spend their money.

The study relies on gross pay, and assumes that after you retire, the withholdings for retirement from your salary will cease and you will pay less income tax on your retirement income than you paid on your salary. The withholdings that stop at retirement include:

Income tax is a little trickier. If your retirement income is less than your salary, you may be in a lower marginal tax bracket that can cause you to pay less income tax. In addition, a portion of your CSRS and FERS retirement benefit is tax-free (the part that represents your contributions). Some states don’t have an income tax or exempt some or all of retirement benefits from taxation. A portion or in some cases, all, of Social Security retirement is tax-free. Withdrawals from Roth IRAs and Roth TSP funds can be tax-free if you meet certainrequirements.

Here are some resources to help you understand retirement taxes a little better:

Comparing CSRS and FERS

Under CSRS, it’s easier to see if you’ve hit the 80 percent target, because CSRS is designed as a single benefit system -- the majority, if not all, of retirement income is in the form of a benefit that replaces a percentage of an employee’s highest three years of average salary based on years and months of service. Under FERS, it’s a little harder to figure, because FERS is a three-level system relying on a basic retirement benefit, Social Security and an employer-sponsored savings plan (the TSP).

Let’s look at a hypothetical pair of employees, each with a salary of $75,000 and 37 years of service:



Of course, this is a highly simplified example. For every individual case, there are many moving parts that need to be explored, including age, salary rate, retirement plan, length of service, marital status, reductions to the retirement benefit for survivor elections and many more.

Overall, though, the point is that to retire comfortably, it’s important to:

By Tammy Flanagan

June 28, 2013