Retirement Decisions in an Unstable Economy

The author says that economic stimulation in the United States cannot last forever and eventually we will have to go through some suffering to make things right. She says federal employees may see more changes coming to their retirement benefits and should have a realistic plan before making the decision to leave government service.

I recently attended an economic research and forecasting conference, sponsored by HS Dent and unfortunately the takeaway was somewhat unsettling.  The fact is that we cannot go on indefinitely putting a band-aide on our country.  The bad news is that eventually the US will have to suffer to make things right.

We can’t stimulate the US economy forever without going bankrupt.  Harry Dent believes it will take a crisis to trigger a debt deleveraging in the US.  We will then have to go to extreme measures to fix our debt situation and entitlement programs.  The alternative is would be to fall into  an  economy similar to that in Japan, with no growth –  as Harry Dent calls it, a “Coma Economy”.

As you are well aware, Federal Employees are an easy target.  With numerous proposals being thrown around in an effort to reduce the deficit, such as cuts to federal employee benefits and pay, many federal employees are choosing to throw in the towel and get out while there is the security of a good benefit package.  While it is impossible to know how this will all play out, it is imperative that you look at your individual situation very carefully, before making any irrational decisions.

Where I see future problems with retirement scenarios is the approach of not looking at the big picture.  Many federal employees run their annuity calculations, social security estimates, and factor a 4% withdrawal from their Thrift Savings Plan and other retirement savings and feel that they can live comfortably on this income.  Most people retiring from the federal workforce can expect to experience 25 years in this wonderful phase of life called retirement.  That’s why it is so important to look at the big picture.

Let’s start by talking about inflation. Federal employees have been very fortunate to have cost of living increases in their pensions, although they have lagged, particularly FERS the real rate of inflation.  Social Security COLA has also lagged real inflation.  Now let’s look at reality, which is the fact that our country is going to have to go through restructuring and as you are probably aware one option being looked at very closely is go to a Chained-CPI.  If this occurs in Social Security and federal pensions, your COLA will further lag historical inflation.  Looking out a few years into retirement, the results do not look severe.  However, with time the results can get dramatic unless you have built a sizable savings.

So far we have just talked about two elements of retirement income: FERS or CSRS annuity, and if applicable Social Security.  The third component of the federal retirement system is the Thrift Savings Plan.

Have you managed to reach your goal?  Do you know what your goal even is?  In order to determine answers to both of these questions I will share with you the approach that I take with my clients.  First off, I ask them what their desired monthly or annual net income is?  Surprisingly the answer I most frequently get is: “Gosh, I don’t know.  I never really thought about that”.  This really is the starting point to determine if you are on track to reach financial success in retirement.  May federal employees would like to have the same take home income in retirement as they did while working.  Others, expect changes in their lifestyle and need to put some thought and a budget forecast into place in order to determine their ideal income in retirement.

Once the income goal is determined, we look at reliable sources of income including federal pension, social security, and the difference that needs to come from savings (TSP, IRA, etc.). What we don’t want to see, but often do, is running out of money during one’s lifetime, especially in the first 15 years of retirement.   What gets included in this analysis is: the historical COLA in CSRS or FERS pension, historical COLA of Social Security, a realistic rate of return of TSP and other savings, historical inflation, and current taxes.

As you can imagine there are several unknowns such as the possibility of cost of living changes made to the federal annuity and Social Security, possibility of tax increases in the future, changes to the FEHB program essentially having the retiree pay a larger portion of their healthcare, and of course the performance of your retirement savings in current low interest period.  The one thing I will say about the latter, is that while you are working and in the “accumulation stage” you are hoping to get as much return on those funds while you are getting a paycheck to live on.  The “distribution” phase is very different.  Now that money that you have accumulated has to work for you, and you want to make sure that it will be there during your lifetime.  There is not a cookie cutter approach that makes sense for everyone, which is why I can’t give blanket suggestions in this article.  It is very individualized and if you don’t have the expertise to do this on your own, you should consult with a professional.

The bottom line is just because you are eligible to retire on an unreduced annuity doesn’t mean that it is necessarily the right thing to do. Take some time to put together a realistic plan, before making such an important decision on retirement.

About the Author

Carol Schmidlin, Certified Financial Fiduciary®, MRFC® is the President of Franklin Planning and has been advising clients on how to grow and preserve their wealth for 25 years. In addition to her financial planning practice, she is the founder of FedSavvy® Educational Solutions, which provides Financial and Retirement Literacy Programs for Federal Employees. She is passionate about helping families with all phases of Wealth Management and is a member of Ed Slott’s Master Elite IRA Advisor Group. Her practice maintains a home office in Sewell, NJ along with a satellite office in Washington, DC. Carol can be reached at (856) 401-1101.