The majority of federal employees will not retire with a million dollars or more in their Thrift Savings Plan (TSP). In fact, only 1% (varies based on the stock market performance) of federal employees currently have over a million dollars in their TSP. However, in terms of retirement income there is the potential for federal employees create retirement income that would require an investment portfolio of one million dollars or greater.
For example, let’s assume an individual covered under FERS has 30 years of creditable service with a high three average salary of $90,000. If that individual retired at 62, they would receive a gross annuity of $29,700 annually. How big of an investment portfolio would it take to create $29,700 of investment income? Assuming a 4% withdrawal of the account value, creating an annual income of $29,700 would require an investment portfolio valued at $742,500. Let’s then assume that this individual has accumulated $400,000 in their TSP over a 30 year career and begins taking a 4% withdrawal annually in retirement which would result in an additional $16,000.
Between the TSP and FERS annuity, this individual would be receiving $45,700 annually. How big an investment portfolio would it take to create $45,700 of investment income? It would take $1,142,500 to generate, again assuming a 4% annual withdrawal. Not bad, especially considering this does not include Social Security which can be collected as early as age 62. Based on a salary of $90,000, the estimate for a 62 year old collecting social security is $18,840 annually. That brings total gross annual income from the TSP, FERS annuity and Social Security to $64,540. Now you may be saying, $64,540 is only 71% of a $90,000 salary but keep in mind once in retirement you no longer have the following deductions:
- TSP (hopefully 5% to 15%)
- Medicare tax (1.45%)
- Social Security tax (6.2%)
- FERS Retirement (0.8% or 1.3% for special category employees)
In my experience, the best place to start when planning for retirement income needs is to focus on your current net pay versus what your net pay will be in retirement. Salary is important for calculating the annuity and TSP contributions but in terms of retirement income planning, the key factor is what gets deposited into your checking account after taxes and deductions. Generally, if you can achieve 100% of your current employed net pay in retirement, taking a reasonable 4% or less annual withdrawal from the TSP coupled with the FERS pension and Social Security, you should feel confident that you have created a sustainable retirement income plan.
Certainly, there are several other factors and details to account for when planning for retirement such as taxes, survivor benefits, health insurance, when to start collection social security, debt, changes to expenses, etc. The goal of this article is to give a simplified, high level overview of a FERS retirement scenario and the value to the FERS retired annuitant.
I encourage all members of the federal employee community to seek out sound retirement counsel from professionals with experience working with FERS and CSRS benefits.