Numerous studies have agreed that the #1 concern that people have who are moving into retirement is running out of money, and this is completely understandable. None of us want to have to get a job at Wal-Mart just to make ends meet in retirement.
We all want to set ourselves up for success and have a stress free retirement. The problem is that it can be very hard to know when we have reached the financial position that will allow us to have a great retirement without worry.
Many of us have heard that we should all have $1,000,000 in retirement savings before we think about retiring, and in some cases, this is 100% correct, but for others this is simply not the case. Many people can retire very comfortably with less.
Let me walk you through an example.
According to a 2016 article by The Motley Fool, the average retiree had the following monthly expenses:
- Housing- $1,294
Total Monthly Expenses: $3,722
Total Annual Expenses: $44,664
Obviously, these expenses are just average and some people will need much more than this every year. For example, if you live in downtown Manhattan, housing expenses of $1,294 are probably not going to happen.
You’ll have to think through your situation and retirement plans to get an idea of what expenses you are going to have in retirement.
For FERS federal employees, a huge part of your retirement income will be your pension and Social Security.
According to OPM, the average salary for federal employees is about $87,000. Let’s assume that most retiring feds have 20 years of service and retire at age 62. This means that their gross annual pension would be about $19,140 (they would get the 10% bonus because of the 62 and 20 rules under FERS).
Once we take out reductions and taxes, a good guess for a net annual pension is probably about $12,000.
According to AARP, the average Social Security monthly retirement benefit is right around $1,500 which comes out to $18,000 annually. After taxes and Medicare part B premiums, an average net Social Security is probably right around $14,000.
But if we assume that most retirees are married, then their spouses would probably be eligible for Social Security as well. Let’s assume the spouse is eligible for about $10,000 per year of benefits after taxes and Medicare part B premiums.
This means that an average FERS federal employee would have:
Net Annual Pension: $12,000
Net Annual Social Security: $24,000
With average expenses for retirees at about $45,000 and the average income for FERS retirees at $36,000, that leaves about $9,000 a year that the retiree would have to cover from their investments.
If we use the simple 4% rule, this means that this retiree would have to have $225,000 in retirement savings to be able to provide the $9,000 annually that they need without running out of money (assuming they invested the funds well).
Now, I am not saying that you should not try to save as much as you can for retirement. We should always try to be as prepared as we possibly can for the what-ifs of life. My main goal with this article is to show that there is nothing magic about having $1,000,000 in the bank in order to retire. It all comes down to what your retirement numbers look like and what type of retirement you want to have.
As you can see, not everyone needs to have $1,000,000 in their TSP before they can retire. Some people will be fine with much less. That being said, I have no clue whether or not $225,000 is enough for you to have the retirement that you want. I made a lot of assumptions in my example above to keep things simple. It is up to you to understand your retirement numbers well enough to know what things will look like for you.