You deserve to enjoy financial security during your retirement years. The best way to ensure that happens is to start planning now.
Harris Federal Law Firm encourages you to ask yourself these three questions:
- When do I plan to retire?
- What will my expenses be when I retire?
- What will my income be when I retire?
The following are guidelines that can help you to find the right answers for your situation. Because our firm focuses primarily on obtaining federal disability benefits for our clients, our guidelines are aimed at federal employees. However, even if you are not a federal employee, you may still find the following useful.
When Do You Plan to Retire?
According to a 2014 Gallup poll, the average actual age at which Americans retire is 62, while the average age at which non-retired Americans expect to retire is 66.
What is your expected retirement age? Is that five, 10 or 20 years from now?
Your answers will shape how you go about planning for your retirement. For instance, if your target retirement age is only a few years away, you may consider investing in high-growth, high risk stocks. On the other hand, if your target age is many years away, you may be better off investing in low-growth, low-risk bonds.
Of course, many factors can go into picking an age for retirement, including the type of retirement you are considering: Disability, early, voluntary or deferred.
The Office of Personnel Management (OPM) indicates you should pick a retirement age that is at least five years away due to the fact that you must carry life and health insurance coverage for at least five years before you retire – or else you risk losing that coverage.
What Will Your Expenses Be When You Retire?
You need to sit down and carefully prepare a list of all monthly expenses that you expect to have during your retirement years. Your list could include:
- Mortgage or rental payments
- Car payments
- Public transportation costs
- Utilities
- Grocery/food expenses
- Health care costs
- Entertainment costs
- Clothing costs
- Family care costs
- All debt payments (credit card, personal loan, etc …)
What kind of life do you plan to lead as a retired person? Do you want to travel or take up new hobbies? Will you need to care for other family members, including your children and/or grandchildren? If so, what will be the costs?
Where you plan to live is important to consider as well. For instance, your expenses could be greatly reduced if you decide to move from a home to an apartment or from a metropolitan area with a high cost of living to a rural area where it is less expensive to live.
Also, make sure to account for inflation, which tends to rise by at least 3 percent each year. You can check out these online retirement-planning calculators to help you factor in inflation:
You also have to factor in state and federal taxes. Check out this Bankrate.com blog article that has a list of the 2014 IRS Tax Brackets.
The key is to be comprehensive. Make sure you include every possible expense in your list. Otherwise, you risk not being adequately prepared for your retirement.
What Will Your Income Be When You Retire?
Once you have your list of projected retirement expenses, you need to figure out how you will pay for all of those expenses. What will your income be? What will be the sources for your income?
If you are a federal worker, the following are the most likely sources:
- Civil Retirement System (CSRS)
- Federal Employee Retirement System (FERS) – For federal workers who first entered covered service on or after January 1, 1987
- Social Security
- Veterans Pension
- Thrift Savings Plan
- Stocks and bonds
- Individual retirement accounts (traditional or Roth IRA)
- Other income (rental, part-time job, etc …).
Generally speaking, your eligibility for CSRS or FERS retirement benefits will be determined by your age, numbers of years of creditable service and whether you meet other special requirements for the type of retirement you are planning. Please check out the links above to learn more about how your basic CSRS and FERS annuity will be calculated (generally, it depends on your years of service and “high-3” average salary).
If you reach full retirement age, or age 62, you can claim full Social Security benefits. If you collect benefits before age 62, the amount could be reduced until you reach full retirement age. If you wait to claim benefits until age 70, the amount you collect could be increased significantly. Check out the Social Security Administration’s calculator to estimate the amount of benefits you could receive.
In addition to age and your numbers of days of active service, your financial need will determine whether you are eligible for VA pension benefits.
The Thrift Savings Plan (TSP) is an important federal employee benefit that you should learn about from the moment you start working for a federal agency. It operates like a 401(k) plan. Some of the important features of this plan are:
Once you become eligible for TSP, your agency will contribute an amount equal to 1 percent of your basic pay each period. However, you can make more “pre-tax contributions,” which means that the amount is taken out of your paycheck and reduces your tax liability.
Also, your agency will match your contributions dollar-for-dollar up to the first 3 percent you contribute, and it will match your contributions 50 cents-to-the-dollar for the next 2 percent. Your TSP could end up contributing heavily to your retirement income.
Finally, you should also account for the income your spouse will contribute to your collective retirement income. By that same token, you will then have to factor in your spouse’s monthly expenses, too, which are different than your own expenses.
Are Your Retirement Expenses Greater Than Your Income?
If your projected retirement expenses come out to being more than your projected income, don’t panic. You may simply need to plan on retiring at a later age and taking steps to prepare yourself for retirement.
In the meantime, you should focus on putting more into your savings, paring down your debts and finding ways to reduce your monthly expenses while you are still working.
What is important is that, by simply reading this article, it means you are seriously thinking now about your retirement instead of letting it sneak up on you or ignoring the matter altogether. You can start planning today and find yourself in a much better position to enjoy your retirement when it arrives in a coming year.
Federal Employee Retirement Planning Worksheet
Harris Federal encourages you to ask yourself, “When do I plan to retire?” Once you have a target age established, you should then work through the following questions:
What Will My Expenses Be When I Retire?
List all projected monthly expenses during your retirement years, including:
- Mortgage or rental payments
- Car payments
- Public transportation costs
- Utilities
- Grocery/food expenses
- Health care costs
- Entertainment costs
- Clothing costs
- Debt payments
- Personal loan payments
- Family care costs
- Hobbies
- Travel
Make sure to account for inflation and taxes. You can estimate a 3 percent inflation rate and apply the tax bracket that you will fall within.
What Will My Income Be When I Retire?
If you are a federal worker, the following are the most likely sources of income:
- Civil Retirement System (CSRS) / Federal Employee Retirement System (FERS)
- Social Security
- Veterans Pension
- Thrift Savings Plan
- Stocks and bonds
- Individual retirement account (traditional or Roth IRA)
- Rental income
- Part-time job income
- Spousal contributions
How Do My Retirement Expenses Compare to My Retirement Income?
Take these steps to determine whether you have a retirement income surplus or shortfall.
1. Calculate your estimated total monthly expenses.
2. Estimate your monthly income from retirement accounts.
Here’s a method (based on a method proposed by FederalHandbooks.com):
-
- Add the total amount in your retirement accounts.
- Multiply that amount by a low interest rate (i.e. 5 percent).
- Divide that number by 12. This is your estimated pre-tax income.
- Multiply your pre-tax income by your tax rate. This is your monthly tax.
- Subtract your monthly tax from your estimated pre-tax income.
- The figure you arrive at is your estimated monthly retirement account income.
3. Add in other projected retirement income (i.e. VA benefits, Social Security, rental income, part-time job, spousal contributions, etc …).
4. Subtract your expenses from your income.
Do I have a surplus?
If so, that’s great news! You may want to consider investing more in retirement accounts, stocks, bonds, etc … or keep adding to your savings.
Do I have a shortfall?
Don’t worry if this is the case. Consider taking immediate steps to supplement your income, cut your expenses and reduce your debts.
