Retirement planning for a federal worker

[Anonymous]

Everytime I try to use a retirement calculator (choose to save or bankrate) to figure out whether we are on track I get stuck on some of the inputs:
1) What rate of return should I assume?
2) What rate of inflation should I assume?
3) And how much of our current income should I assume we need to replace?
We are a federal worker and a mostly SAHM with a part-time job. We are 16 years from retirement.
FERS pension should replace 33% of current income, I'm assuming we should get max. social security benefit for the two of us.
I've been trying to figure out whether our TSP contribution is sufficient but the answer depends on what I put into the three above inputs.

We will still have a mortgage payment for 6 years into retirement but even if we didn't, our house will be old enough I assume that even without a mortgage payment, we still need to have close to that amount for repairs and improvements (and higher property taxes).
Thanks!

[Anonymous]

Fidelity has one that will tell you if you are doing ok, I would check their website.

[Anonymous]

The return/inflation questions are very hard because people can tell you what happened in the past but no one can tell you what will happen in the future.

You could check historical return/inflation rates-- I think they run about 6-7% for a balanced portfolio of stocks and bonds, and about 3% for inflation. There are people who will say that going forward you should expect more like 4-5% for a balanced portfolio but I can't tell you if they are right, or if inflation will stay around/under 2%.

Basically you can use different figures to test how much wiggle room you have-- do you need 7% returns to be on track?

% of income is a very crude measure of retirement expenses. Ideally you would try to estimate your actual expenses, but if that seems too complicated, then try replacing all of your income except the amount going to retirement savings (or other big chunks you'll be done with-- like college or mortgage). So if you currently put 10% into TSP estimate that you'll need 90% of your current income.

[Anonymous]

Anonymous wrote:The return/inflation questions are very hard because people can tell you what happened in the past but no one can tell you what will happen in the future.

You could check historical return/inflation rates-- I think they run about 6-7% for a balanced portfolio of stocks and bonds, and about 3% for inflation. There are people who will say that going forward you should expect more like 4-5% for a balanced portfolio but I can't tell you if they are right, or if inflation will stay around/under 2%.

Basically you can use different figures to test how much wiggle room you have-- do you need 7% returns to be on track?

% of income is a very crude measure of retirement expenses. Ideally you would try to estimate your actual expenses, but if that seems too complicated, then try replacing all of your income except the amount going to retirement savings (or other big chunks you'll be done with-- like college or mortgage). So if you currently put 10% into TSP estimate that you'll need 90% of your current income.

this is the op - thank you for taking the time to write such a detailed response. It is most helpful. Also thanks to the pp.

[Anonymous]

I struggle with this as well (although I'm 30 years out from retiring) with other variables such as will they gut the federal pension and will I receive any social security.

[Anonymous]

Anonymous wrote:I struggle with this as well (although I'm 30 years out from retiring) with other variables such as will they gut the federal pension and will I receive any social security.

Obviously no one knows but I think changes to fed pensions are most likely to be prospective not retroactive (although that's not what happened to the military so perhaps that's not right).

Also for SS-- the idea that it will go bankrupt is a myth being pushed by people who want to cut back benefits. It's been 30 years away from "insolvency" for the last 30 years, and even in a "worst case" scenario it would still pay 70-80% of scheduled benefits.

[Anonymous]

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.

[Anonymous]

No one really knows exactly how much you will need...but personally I like to check various different calculators. I think it gives a better picture.

Mr. Money Mustache is one of the blogs I like, he makes a good point that SPENDING determines how much you need. So the less you spend the less you need. I think he says 20-25 x annual spending as a ballpark.

FIRECalc is the same idea, but much more sophisticated...

http://www.firecalc.com/

[Anonymous]

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?

[Anonymous]

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!

[Anonymous]

^ NP, here, just shows how dumb I am, I thought both of you were referring to social security when you said SS benefit.

[Anonymous]

This whole conversation is scaring me... because I really don't understand it. I think there are retirement seminars from time to time offered by our agencies (fed) - I think I'm going to try to go to one.

[Anonymous]

Anonymous wrote:^ NP, here, just shows how dumb I am, I thought both of you were referring to social security when you said SS benefit.

What is SS if not social security?

[Anonymous]

Anonymous wrote:This whole conversation is scaring me... because I really don't understand it. I think there are retirement seminars from time to time offered by our agencies (fed) - I think I'm going to try to go to one.

If they aren't offering it, contact your retirement coordinator in HR and request that s/he arrange one. Just beware that there are usually two components to these retirement seminars: 1) OPM benefits specialist or retiree doing consulting gives you the lowdown on benefits, and 2) financial planner talk. Beware the financial planner who may or may not be a good one and take what what they have to say with a grain of salt. They can't give you specific answers and they are likely to try and sell you on making an appointment so they can sell services (read: charge you fees). You may benefit from that or you may not.

[Anonymous]

Anonymous wrote:

Anonymous wrote:^ NP, here, just shows how dumb I am, I thought both of you were referring to social security when you said SS benefit.

What is SS if not social security?

I think the PP I was referring to was talking about the supplemental retirement benefit feds get until they turn 62. I don't know much about it but I know there's a lot of controversy around nixing it.