What Does Your Retirement Income Timeline Look Like?
by Micah Shilanski, CFP |
Federal employees have unique financial planning considerations that most generic financial planning info doesn’t address. One of those unique considerations is your retirement income – when it starts and when it changes.
The concept of diagramming out your income timeline can help all federal employees planning their retirement. And some federal employees have some very unique changes to their income in retirement that are difficult to see unless you draw out a timeline.
Drawing Income Timelines for Federal Employees
When I meet with new clients, we talk about concepts from a 30,000 foot view first – then we look at things in detail. It helps us make sure we’re all on the same page, and makes it easier when we do get to the finer points of planning.
One of the ways I help my federal employee clients is by drawing a diagram of their retirement income. For many federal employees, this is an ah-ha moment. It’s very simple – but they’d just never looked at their retirement income in this way.
Drawing Your Own Income Timeline
It is important to remember that this exercise is about the big picture.
Drawing your timeline here is a simplified exercise, and we’re not going to look at inflation, rates of return, taxes and many other factors that come into play later.
We are just keeping things very simple here and talking in today’s dollars. Once you feel comfortable at the big picture level, you will feel more comfortable when it’s time to dive into the details later on.
Step 1) Draw Your Timeline
On the bottom of the timeline, start by marking the age you’ll be when you want to retire. Then make a mark for age 62, another mark for your full Social Security Age (between 65 – 67 depending on when you were born) and one last mark for the age you would like to live to be.
When you draw your timeline, we’re most interested in seeing when your income starts, stops or changes – less worried about making the timeline perfectly to scale.
For our example, let’s say we have Bob, who plans to retire at his minimum retirement age (MRA) of 56; his full Social Security age is 66, and he hopes to live to 96. The first part of Bob’s timeline might look like this…
Step 2) How Much Spendable Income Do You Want?
Now make a line for how much *spendable* money you want each month in retirement.
We’re not going to be worrying about inflation, COLA, or taxes right now – just write in the amount of money you want to spend each month in retirement.
What do I mean by *spendable*? Think about your pay now – there’s your ‘gross’ pay that is on your LES, and then there is the ‘net’ amount that is actually deposited into your bank account each pay period – your ‘take home pay’. Here we’re talking about how much ‘take home pay’ you want a month in retirement.
We start with this number – and later we look at taxes, deductions, inflation, etc. But right now for this exercise, you just want to think about how much money you want to be able to spend each month in retirement.
This seems pretty simple, but you’d be surprised at how many people don’t know this number.
If you don’t know – I think it’s best to start with what you’re spending right now. Not your gross monthly income – but how much you spend each month. What is your take home pay each month? You can start with that number.
For our example, let’s say Bob wants to have $4,700/month in spendable money in retirement.
Step 3) Draw a Line for Your *NET* Pension
The next step is to draw a line for your net pension. Not your gross – but your net pension. Calculating your net pension is an important part of your retirement planning.
Many people have calculated their gross federal retirement pension. It is important to remember that you won’t actually be receiving all of that amount. Survivor benefit cost, taxes, FEHB and more will reduce the amount of your pension significantly—and it is important to be prepared for that.
If you’ve never thought about your gross vs. net pension, you might read my article about calculating your net pension.
Once you have your Net pension number, draw a line for that towards the bottom of the graph.
To continue Bob’s example, we’ll say Bob’s *NET* FERS pension is $1,550/month. Now Bob’s timeline looks like this…
Step 4) Draw Lines for Other Fixed Income Sources
Now we want to draw lines for any other fixed income you might have in retirement. This could be the FERS Supplement, Social Security, perhaps a Military Pension, or a Spouse’s Pension.
The tricky part about retirement income for most federal employees is that it doesn’t all start at the same time, and some streams of income stop or change along the way.
For example FERS who get the FERS Supplement need to remember that the Supplement stops at 62 whether or not you’ve started Social Security. And for CSRS Offset retirees, remember your pension is reduced at age 62 whether or not you’ve started Social Security.
So for our example, we’ll say Bob is retiring under FERS MRA+30 rules and he’s eligible to receive the FERS Supplement. We’ll estimate Bob’s *NET* FERS Supplement as $1,000/month. We mark a line for the Supplement from Bob’s retirement at age 56 until age 62 when the Supplement will stop.
Now let’s draw in a line for Bob’s Social Security. Bob’s going to wait until his Full Social Security Age of 66 to begin Social Security. While there is a chance that a portion of Bob’s Social Security benefit will be taxed, to keep things simple for this example – we’ll just put in his full benefit of $1,875. So we’ll start our line at Age 66 and mark his benefit of $1,875/month. Here’s what Bob’s timeline looks like now. ..
Step 5) Look at the Gap
The next step is to look at the gap between your desired income and the fixed income you’ll have coming in at different times in your retirement.
Looking at Bob’s timeline, we can see that his ‘gap’ changes. It starts out at $2,150/month from retirement until age 62. Then when his FERS Supplement stops at age 62, his gap becomes $3,150/month. When Bob starts drawing Social Security, his gap reduces to $1,275/month.
How to Fill the Gap?
Drawing your income timeline is a simple exercise to help you *see* your gaps.
Once you get a general sense of where the gaps are in your retirement income, the next step is to add in the variables that affect your income over time like inflation, COLA, etc. Then once you have a more detailed estimate of your gaps – the next step is to make a plan to fill those gaps.
This is where your TSP, IRAs and other personal investments come into play.
Ever Looked at Your Retirement Income This Way?
This is just one of the exercises that users walk through in my new online do-it-yourself program to help FERS federal employees plan their retirement.
I’ve created FERS Route to Retirement, to help FERS learn about their benefits from a financial planning perspective, and create their own financial plan.
If you’ve never looked at your retirement income this way, what else might you be missing?
© 2013 Plan-Your-Federal-Retirement.com. Plan Your Federal Retirement is a dba of Shilanski & Associates, Inc., an Alaska Registered Investment Advisor, with securities offered through Summit Brokerage Services, Inc., Member FINRA/SIPC.
by Micah Shilanski, CFP |