How Much Money Will I Receive in Retirement?
By John Grobe
Thursday, July 12, 2007
If you are a regular FedSmith reader, hopefully you are interested in all parts of your career (including retirement) and have a pretty good answer to this question.
We can determine what we will get from our CSRS or FERS annuity relatively easily. Most agencies have Human Resource websites that will give you a good estimate as to how much you will have when you retire. When you get close to retirement, you can have a human resources specialist compute a retirement benefit for you, just to be sure.
We also have an easy way to figure out what we are entitled to from Social Security. If you are a FERS employee, chances are that your annual Social Security Statement is correct. Do be aware, however, that the benefits it lists for various ages (i.e., 62, your full retirement age, and 70) are based on the assumption that you will continue to work up until those ages, and that you will continue to make a salary similar to today's.
If, however, you are CSRS, CSRS Offset, or a FERS Transferee, you may be hit by the Windfall Elimination Penalty (WEP). The annual Social Security Statement does not factor in the WEP, so you may be entitled to less than the statement indicates. The website of the Social Security Administration (http://www.socialsecurity.gov) has a WEP calculator that allows you get a better handle on what you will get from Social Security.
Determining how much income we will receive from the TSP is a little trickier. If your agency provides an annual benefit statement, it almost certainly lists potential TSP income as a level-payment annuity. The problems with this are that TSP annuities are the least popular withdrawal choice and that a level-payment annuity is not indexed for inflation. How can you get a better estimate?
You can go to the TSP calculator on the TSP website (there is a link to it on the TSP homepage) and compute a different method of payment. You might want to compute an increasing-payment annuity. Even if you choose a different method of withdrawal, the amount of the increasing-payment annuity estimate will factor in an inflation increase of roughly 3% per year. You may be surprised at how much lower the increasing-payment figure will be than the level-payment figure.
You can take the advice on many financial planners who suggest that an annual withdrawal rate of 4% to 5%, increased each year by the amount of inflation will have excellent odds of lasting you for your entire retirement. Planners use Monte Carlo Simulators to come up with these percentages.
The simulator runs hundreds, or thousands, of possible investment scenarios, from the very positive to the very negative and gives odds of running out of money in a fixed period of time, usually 30 years. Assuming a portfolio that is 60% stocks and 40% fixed income investments, the odds of running out of money in 30 years at a 4% withdrawal rate is less than 5%. Using the same assumption, the odds of running out of money at a 5% withdrawal rate is less than 10%. In addition, there is an excellent chance that you will have money left over for heirs.
© 2009 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.
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