Making Your Money Last Through a Multi-Decade Retirement

By on July 15, 2013 in Current Events, Retirement with 29 Comments

Just thinking about the subject of this article made me think “Are we lucky, or what”?  A federal retiree has much less to be concerned about than the vast majority of American retirees.  Why is that, you ask?

First, we have a pension.  The Office of Personnel Management insists on calling it an annuity, but whatever you call it, it is lifetime, inflation adjusted income.  Not too many private sector retirees are getting old-fashioned pensions anymore; even less are receiving cost-of-living adjustments.

Let’s look at three examples, one CSRS and two FERS.  In all three examples the employee worked 32 years and had a high-three salary of $70,000.

  • A CSRS retiree would receive a pension of $42,175 before deductions/reductions.
  • A FERS retiree who retired prior to the age of 62 would receive a pension of $22,400 before deductions/reductions.
  • A FERS retiree who retired at the age of 62 or older would receive a pension of $24,640 before deductions/reductions.

The above examples are for regular retirees.  Special category retirees (e.g., law enforcement, firefighters, air traffic controllers, etc.) would receive more as would Congresspeople who took office prior to January 1, 2013.

Second, many of us have Social Security.  FERS retirees will get an unreduced Social Security benefit, as will some CSRS Offset retirees and FERS transferees.  CSRS retirees who have earned 40 or more Social Security credits will receive a Social Security benefit, but it will be reduced by the Windfall Elimination Provision (WEP).  Many retirees who are CSRS Offset or FERS transferees will also be subject to the WEP.

The average Social Security benefit is $15,132 in 2013.  A FERS retiree is likely to receive a higher benefit than the “average” as federal salaries are higher than the average private sector salary.

Let’s say our retiree wanted to keep the same standard of living in retirement that they had while working.  A rule of thumb often used by financial planners is that 80% of pre-retirement gross income is sufficient to maintain the current standard of living.  Of course there are many exceptions to this rule, so tread carefully when using it.  An individual who was still carrying a large mortgage, or who still was supporting children might find the 80% rule a little tight.  80% of our high three of $70,000 would be $56,000.  How close are our hypothetical retirees to this amount?

  • Our CSRS retiree (I assumed no SS) would be $13,825 short.
  • Our FERS retiree who retired before the age of 62 (I assumed $18,000 of SS) would be $15,500 short.
  • Our FERS retiree who retired at age 62 or older ( I assumed the same $18,000 of SS) would be $13,360 short.

All of our hypothetical federal retirees ended short of 80% of their pre-retirement gross income.  Using financial planners’ rules of thumb (here we go with those general rules again – remember that they do not apply to everyone) of beginning withdrawals at a 4% to 5% rate and adjusting it annually for inflation, we come up with an amount somewhere between $300,000 and $350,000 being necessary to generate the level of income needed to hit the 80% target.  Where’s that money going to come from?  From your TSP or other investments.  Is that possible to save that much?  Absolutely, if you began saving early enough.  I am fond of telling participants in Federal Career Experts’ mid-career and early-career retirement planning classes that “there’s no such thing as having too much money in your TSP”.

From here on in the article we will assume that you were able to save up that amount of money and are wondering how to withdraw it so that you will not run out of money before you run out of time.  We will also assume that you amassed the money within your Thrift Savings Plan.

If you are going to count on your TSP to generate a stream of income during your retirement, you will likely choose one of these two options; an annuity or monthly payments.  You can make this choice either in or out of the TSP.  First let’s look at our options within the TSP.

With the TSP withdrawal choice called “substantially equal monthly payments”, your money remains invested in the TSP and you elect a monthly payments based on two choices.  They are: 1) payments of a specific dollar amount; and 2) payments based on the IRS life expectancy table.  If you choose payments of a specific dollar amount they cannot be less than $25 per month and can be changed once a year, during an open season in December.  As long as you retire in the year in which you reach the age of 55 (or later) you will not be subject to the 10% early withdrawal penalty on any monthly payments from the TSP.

When choosing the monthly payment option, be aware that, if you withdraw your funds aggressively, you might end up running out of money before you run out of time.  With the IRS life expectancy option, be aware that when you hit the age of 70 ½ you will be switched to the minimum required distribution rate, which will significantly reduce your payments from what you were getting at age 69.  Many financial planners recommend beginning your withdrawals at a 4% or 5% rate and adjusting the amount annually by inflation.  Studies using “Monte Carlo Simulation” tools have shown that, with a balanced portfolio, your chance of running out of money in 30 years is less than 10%.  Let’s look at the annual amount that could be withdrawn at a 4% or 5% rate.

  • 4% of $300,000 is $12,000; not enough to bring our retirees to the 80% level;
  • 5% of $300,000 is $15,000; this will do it for two of our three hypothetical retirees;
  • 4% of $350,000 is $14,000; this also will do it for two of our three hypothetical retirees;
  • 5% of $350,000 is $17,500: enough to take all of them over the 80% level.

The other choice for those who leave their money in the TSP is purchasing a TSP annuity.  TSP annuities are sold by MetLife.  A TSP annuity will guarantee that you will not run out of money in your lifetime.  Joint annuities provide that protection for spouses as well as for those who have an insurable interest in your life.  There are no early withdrawal penalties with TSP annuities, regardless of your age when you begin payments.

The interest rate index used in the computation of TSP annuities is very close to its all-time low level.  When this article was written in March 2013, the index was 2%.  This results in our retiree not receiving enough annual income to achieve the 80% replacement rate.  The most generous computation for a 62 year old that was spending $300,000 on a joint annuity with a cash refund feature and a 50% survivor annuity came out at $10,476 per year.  Spending $350,000 for the same annuity increases the annual payout to $12,216.

The book, Withdrawing Your TSP Account After Leaving Federal Service, has detailed information on these two withdrawal methods (as well as other methods).  The book is available on the TSP website.

The TSP website has calculators that can help you estimate the amount of money you might be able to receive under both of the above options.  Do be aware that the calculators are not the most sophisticated ones available, particularly the monthly payment calculator.

Of course, you are not required to leave your money in the TSP.  Many retirees choose to move their money into an Individual Retirement Account (IRA).  Within an IRA you can set up monthly payments, just like you can in the TSP.  IRAs however, give you more flexibility in changing the amount of your payments.  You can change the amount at any time.  In fact, your payments do not even have to be taken monthly.  You could set them up bi-monthly, semi-annually, or however you want.

Once you roll money into an IRA, you will face the 10% early withdrawal penalty on any money you withdraw before you reach the age of 59 ½.

Money that is in an IRA can also be used to purchase an annuity.  You should thoroughly investigate any annuity investments, because all annuities are not created equal.  Make sure you completely understand what you are getting in to before you invest your money.  There are no early withdrawal penalties with annuities.

John Grobe’s latest book, The Answer Book on Your Federal Employee Benefits, has just been released by LRP Publications. The book is written in an easy to understand question and answer format and covers all areas of federal benefits from the perspective of an employee at various stages of their career. Order your copy at shoplrp.com.

© 2016 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

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About the Author

John Grobe is President of Federal Career Experts, a consulting firm that specializes in federal retirement and career transition issues. He is also affiliated with TSP Safety Net. John retired from federal service after 25 years of progressively more responsible human resources positions. He is the author of Understanding the Federal Retirement Systems and Career Transition: A Guide for Federal Employees, both published by the Federal Management Institute. Federal Career Experts provides pre-retirement seminars for a wide variety of federal agencies.

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