Getting By or Living High After Retirement?

How well can you expect to live after your retirement from government service? Here are a couple of illustrations.

How well prepared are you for retirement? When you retire, will you live a life of luxury or barely be able to pay your bills with a small amount left over each month for going to the movies or an occasional dinner at a sit-down restaurant without a drive-through window for carry-out?

We get e-mail and comments from readers with a wide variety of financial situations. Some are in the newer FERS retirement system. Some readers are under the older defined benefit system (CSRS). Some readers retire early and take a penalty on their retirement annuity. Some have invested in the TSP since its inception and others never got around to or could not afford to investing any money into the TSP program.

And, to further complicate matters, some TSP investors have put all of their money into the G fund since they started investing while others have been more astute and put more of their TSP investments into stock funds which have grown substantially since the 1980’s.

In other words, it is not possible to create a example or provide advice that fits all situations. And, whenever we do an article on retirement expenses and income, we hear from readers with comments such as "Your example doesn’t fit my situation." No doubt, that is true. But here are several examples that should give some guidance to a wide variety of our readers.

How well you will be able to live when you retire? The income guidelines and resulting lifestyles outlined below are highlighted in Kiplinger’s Personal Finance Magazine.

Generally, financial advisors tell their clients that they will need about 80% of their pre-retirement income to live comfortably after quitting work. It doesn’t make much difference where that amount comes from. It could be that your CSRS annuity will generate enough to meet this goal when you cut back on expenses. You won’t be commuting, you may sell one of your cars and you move to a different, less expensive city or geographic area–all of which will help you cut expenses.

Other readers will take a new job–either to help meet their expenses or because they want to do something different besides going to work doing the same thing they did for the past 25 or 30 years. If you shoot for the 80% figure, you will be safe and you can adjust that up or down after you have been retired for awhile and figure out your real expenses in your new lifestyle.

Many readers will look at these examples and realize they are better off than they thought–all that will be required is careful planning to make sure your appetite for fun and adventure doesn’t eat into your financial resources so that you have enough to live on for the rest of your life. Some readers will also read the examples and realize they may need to cut expenses more than they realized; perhaps moving to a state with lower taxes and less expensive housing.

But the examples demonstrate how you may be able to more effectively plan for retirement.

In each of the three situations below, it assumes you will be withdrawing 4% a year from your savings pool. That savings pool could be from your TSP account, IRA withdrawals from accounts you or your spouse have set up, or money from certificates of deposit at your local bank.

Getting By and Enjoying A Quiet Life

As a first example, assume you and your spouse need to have a joint annual retirement income of about $70,000 to meet your goal of having 80% of your pre-retirment income. That $70,000 could come from your CSRS pension; Social Security payments, withdrawals from your TSP account or IRAs you set up during your career.

If you have savings of about $500,000, and you are 65 years old, you will be able to withdraw about 4% of that each year to comfortably ensure that you do not outlive your money. Withdrawing 4% of your savings each year will give you $20,000 per year and go toward your annual income of $70,000.

About $45,000 of your annual income will go for the usual expenses all of us have such as food, mortage or rent, clothing from Wal-Mart or a discount mall, taxes and health insurance. You will also have enough to go to a comfortable sit-down restaurant every week or so.

Your budget will leave you about $2000 per month. Most of this "extra" $2000 will likely go for incidental expenses such as fixing your car, visiting the grandkids in another state every so often and a special event occasionally such as celebrating an anniversary.

Living Well

If you have accumulated savings of $1-million or so, you will be able to live your life with more options available to you. If your annual income needs to be about $90,000, a withdrawal rate of 4% from your savings pool will give you $40,000 toward that annual income. You will have more discretionary income so you can spend more on entertainment, clothes or a bigger car to impress your neighbors in your house on the golf course. You will be able to buy more gifts for the grandchildren and you and your spouse will be able to go to a play or plan on taking a nice vacation or two every year.

Living High

Some readers with two high-income wage earners throughout their career will have accumulated savings of two million or more if they saved money, invested faithfully in the TSP and diversified their investments between stocks and bonds when they maxed out their TSP investments each pay period.

This couple will need a retirement income of $130,000 or so–$80,000 of which will come from withdrawing 4% from their personal savings each year. This couple may decide to sell their current house (with a paid-off mortage) in McLean, Virginia or Potomac, Maryland and buy a condo in Florida and a second one in the mountains of North Carolina to take advantage of the seasonal changes. They will need an estate plan to ensure the money left over after their demise goes as far as possible and to the people or causes they prefer. Even with their higher income taxes (federal income taxes as they may decide to live in a state with no income tax), they will be able to have extra money for occasional trips to Europe or Asia or help pay provide a college education for the grandchildren.

Of course, if both people were senior executives and had 25 or more years of service and are still in the CSRS system, their annual pension payments will give them an added boost. They may well have a total income that approaches $200,000 per year after withdrawing the $80,000 yearly withdrawal from their nest egg.

If you are one of the few in this situation, your federal careers were very successful and you will probably continue to enjoy life to its fullest. Congratulations and enjoy the new luxury car you can drive to the golf course from one of your condos.

Which lifestyle will you be enjoying after retirement? These examples may help you be realistic in meeting your financial goals.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47