Retirement planning for a federal worker

[Anonymous]

Withdrawals from any retirement account (such as TSP or 401k) are taxed at ordinary income rates, not cap gains.

"Most" people consider 4% withdrawal to be a perfectly fine/conservative withdrawal rate. Bogleheads tend to be savers, and there are a lot of them who tend to be conservative in their assumptions, so you can certainly find discussions there about lower "safe withdrawal rates" but I think they are overstated.

I don't think the SS supplement plays a big role in retirement planning for most people--i think it runs about half of your SS benefit and only lasts from retirement to age 62.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I would keep track of your actual expenses-- use YNAB or mint for a while to do that. Figure out what you need every month to pay your bills. That times 12 is what you need annually.

I would not plan on taking out more than 2-3% of your TSP per year or you could run out, depending on how long you and your spouse live.

I have a pretty similar scenario as you, pension is 33% of income, which should give me about $48,000 pretax per year, plus the SS benefit (not sure what that would be but I assume something like $1200 per month). Post-tax for the pension would be about $36,000 per year or $3000 per month (taxed as regular income @25% or so). So that's an estimated $4200 per month, pension with the supplemental SS.

My living expenses right now are $7000/month. So my shortfall would be about $3200 per month, or more like $40,000 per year (due to paying capital gains taxes). So my TSP account, to sustain 30 years of about that amount, would need to be, rounded up, about $1,300,000. But that's not including inflation-- the pension will be tied to a COLA but $3000 won't be enough per month in the future so there would have to be some growth to account for inflation.

To make up that shortfall, if I retire at 55 I could work at another job. Or maybe lower expenses more... If I don't have $1.3M in my TSP which I'm thinking I won't...

You can do similar math to figure out your situation.

OP again. Thanks this is very useful not least because we seem to be in a similar situation but also because you seem to have a better handle on how to estimate how much you'll need per year as well as in your TSP. If you don't mind may I ask:
1. Your expected SS benefit seems on the low side
2. Is the pension and SS benefit taxed as ordinary income and the TSP annuity at capital gains tax rates?
3.. You are assuming you can only take out 3% of your TSP every year. That seems low. Is it because you plan to pick the 100% survivor benefit?[/quote]

Hi, PP here again---

On the SS benefit-- what I'm referring to is the SS supplemental that you get between Fed retirement age and 62, if you do retire at your age. And to be honest I have not been able to figure out what that # is-- is it the same as what SS is estimated to be at age 62? Or figured differently? I actually don't know which is why I estimated it on the low side. My estimated SS at this time is more like $1700 per month so it might be higher.

On taxes -- the pension and SS are both taxed at your ordinary rate (estimated at 25% but could run higher). I'm not planning on taking the TSP annuity if I can help it. I prefer to leave it and not touch it until 59.5 yrs and then take 3% or so per year-- that would be taxed at 15% I believe (but I'm not sure!).

Re: the 3%, most finance people (see www.bogleheads.org for example) believe that to make a nest egg last you really can't take out more than 2-4% in a year. Think about it-- let's say average return (but not guaranteed!) is 7% and inflation is 3%-- that only leaves 4% to take out or you'll be eating your nest egg. If you need that money to take care of you at the end (nursing home or what have you) you simply can't deplete it by, say, going on vacation in your 60s.

Retirement is really complicated-- if you can, OP, take one of those retirement seminars that are offered through the work place. Usually they are held a couple of times a year. There are early, mid and end of career seminars but it's really all the same info for the most part. They help a lot. GL!

Op again. Thanks for the clarifications- it helps a lot. You really seem to have a handle on how best to make an informed decision.

[Anonymous]

Anonymous wrote:Withdrawals from any retirement account (such as TSP or 401k) are taxed at ordinary income rates, not cap gains.

"Most" people consider 4% withdrawal to be a perfectly fine/conservative withdrawal rate. Bogleheads tend to be savers, and there are a lot of them who tend to be conservative in their assumptions, so you can certainly find discussions there about lower "safe withdrawal rates" but I think they are overstated.

I don't think the SS supplement plays a big role in retirement planning for most people--i think it runs about half of your SS benefit and only lasts from retirement to age 62.

This impacts how much you think you will need in retirement to maintain your lifestyle. When you are paying into your TSP the contributions are not taxed and your taxable income is therefore lower. So, if you earn $100,000 and save 10% in your TSP, your taxable income is just $90,000.

If you retire at age 66 and your pension, social security benefit and TSP annuity all add upto 90% of your working income, the entire amount (in my simple example, $90K) is subject to income tax and none to capital gains tax.

In other words, because you don't need to save for retirement anymore, you may need less income to maintain your lifestyle in retirement.
I assume payroll taxes are taken out of the $100K annual income while you work but not out of the $90K annual income when you are in retirement. So my hypothetical worker only needs to replace 83% (approx.) of pre retirement income now that he does not need to contribute 10% to a TSP and does not need to pay (7%) payroll taxes.

Anyone know how health insurance works? Right now, we pay just under $5000 in premiums every year (approx.) but this is not taxed. Does our contribution stay the same in retirement (is the govt. match the same for retired workers?). Is the premium tax-deductible in retirement too?

[Anonymous]

Op again. Thanks for the clarifications- it helps a lot. You really seem to have a handle on how best to make an informed decision.

<blush> Thanks! I took those retirement courses three times over the course of my career which has helped, but still there's more to learn and to tweak. I have made some mistakes over the years-- not really big ones, like not contributing to TSP, but smaller things that I could have done better. It's very hard to figure everything out and the landscape keeps changing.

One thing that I'm noticing in my workplace is that the CSRS folks had it SO much better. Depending on their age, they are retiring with 70% or more of their salary, plus whatever they were able to save on the side. It's such a better deal than FERS. They switched from CSRS to FERS in about 1984-1985 or so, so you are starting to see the first FERS retirees. They can only do it if their spouse is still working, or they have another job to go to right after retirement, or they sell their home here for a nest egg and then move somewhere with cheaper cost of living.

The main rule for FERS is that retirement is a 3-legged stool: the FERS pension (approx 30-40% of your income, each 1.1% is equivalent to a year of service); the SS supplemental benefit or regular SS, depending on how old you are; and your own savings (TSP and other). A fourth leg would be any part-time or full-time work that you would start after you retire from the Feds, but there's an income cap on that to get the SS supplemental (I believe it's $17,000 per year). Anyway, GL OP!

[Anonymous]

The difference between CSRS and FERS isn't as big as many people think because FERS retirees get SS-- in fact employees earning under 100k may be better off under FERS.

My impression is that health insurance for retired feds (if you meet the requirements to stay in FEHBP) is exactly like health insurance for employed feds except the premium is not paid pre-tax.

[Anonymous]

Anonymous wrote:The difference between CSRS and FERS isn't as big as many people think because FERS retirees get SS-- in fact employees earning under 100k may be better off under FERS.

My impression is that health insurance for retired feds (if you meet the requirements to stay in FEHBP) is exactly like health insurance for employed feds except the premium is not paid pre-tax.

that sucks - so that tax hit has to be budgeted for. It's nice that the employer premium match continues into retirement though because health insurance would be very expensive otherwise.

[Anonymous]

Anonymous wrote:The difference between CSRS and FERS isn't as big as many people think because FERS retirees get SS-- in fact employees earning under 100k may be better off under FERS.

My impression is that health insurance for retired feds (if you meet the requirements to stay in FEHBP) is exactly like health insurance for employed feds except the premium is not paid pre-tax.

No match on TSP contribution either I believe.