Welcome back to my series “Ten easy ways to ruin a Federal Retirement”. I will once again acknowledge that my title is a bit glib for a serious topic, but since we live in the era of “listicles’, I thought I would follow that format. I hope you find these to be helpful.
To clarify, I’ve written this list with FERS. FERS RAE, FERS FRAE and CSRS Offset in mind, but the missives within apply to CSRS as well.
I will cover numbers one through three in this piece.
- Just show up
- Cover expenses and save if you can.
- Borrow against tomorrow.
I have selected this order because these three all have habits in common. In over 20 years, I have learned that habits build wealth. That’s right, I wrote wealth because that is what we are talking about when it comes to a retirement today. You need to build sufficient assets in various vehicles (TSP, IRAs, Investment accounts etc.) to provide for your needs, wants and living expenses for the REST OF YOUR LIFE.
As a career Fed you will have a retirement annuity. The amount of that annuity will not be sufficient for a truly comfortable retirement in and of itself (but will help the overall picture). If you are FERS or CSRS Offset you will also receive Social Security. Again, this will certainly help, but even this additional income stream may fall short.
The balance of your cash flow for needs, wants, and dreams will come from the pool of assets that you diligently work to build.
So, let’s dive in.
1. Just show up.
There was a time in Federal service where 41 years and 11 months of service would formulaically produce an 80% (of high three) pension for ALL Federal employees (excluding special provisions). One system, one formula. Put in the time, collect the pension. That changed in 1986 with the introduction of FERS.
Now I want to be very clear; 80 to 100% can be reached. However, it will require strategy, discipline, and habits. I say this because the FERS system has more moving parts. More parts mean more decisions. More decisions allow for a margin of error.
For example, let’s use the same 41 years and 11 months ( I’ll allow that you may have a month of unused sick leave by that point). The FERS formula will produce the following pension; 42 X 1.1% = 46.2% of high three (Note: this assumes retirement after age 62). For a high 3 of $100,000 this would be $46,200.
46.2% is a great FERS pension, but a far cry from 80% or more. True, the FERS retiree will have Social Security payments as well, but I have found that SS payments are typically not large enough to make up the difference.
For example, as of 2022, the Social Security maximum monthly benefit at age 62 would be $28,368 per year. Rounding, that’s 28.37% of the $100,000. Combining with the FERS pension, we’re close: 74.57%. But we are still well short of 80%. How short? 5.33%. In dollars that is $4,264 per year (Based upon the $80,000 target.)
Doesn’t seem so bad?
Would you accept a 5% pay cut today? Not likely.
So where will the extra money come from? Savings and investing, which leads us into number two on the list.
2. Cover expenses first and save if you can.
I know that most folks do not set this up as a goal, but I have observed that all too many times it seems to happen this way. In the previous paragraph, I identified the need for strategy, discipline, and habits. Let’s address the last two.
Over the years at Serving Those Who Serve, we have identified that people who achieve financial stability, financial comfort or financial success have three traits in common that are never lacking:
- A) They managed and ultimately eliminated installment debt
- B) They created a wedge between income and lifestyle.
- C) They took advantage of mental capital.
For today’s article and this key point, I will dig into A and B.
A. At the risk of sounding dramatic, debt is not your friend. It can be a tool. It can even be a tool that is used well. But, in general, paying it down and paying it off and not permitting it to grow is an important goal. Consumer interest rates, especially those for credit cards, are negative drains on wealth building. Any rates above 10% consume more wealth than even the stock market can build.
Lay out a strategy to pay all cards off and then commit to keeping them paid off each month. Your retired self will thank you.
Let’s move on to B. Plainly, financially successful people do not live beyond their means. In fact, they work to live slightly below. This creates a “wedge” between income and lifestyle. They then maintain that wedge over time. Certainly, as income increases so does lifestyle, but a much slower rate. In this way the “wedge” increases over time in real dollars. In this way “wedge” dollars may be directed to savings and investment.
By building a sizable household savings, the need for installment debt is greatly reduced. In effect you will become your own bank. New furnace? Don’t worry, you have the cash.
This lays the foundation also for maximizing TSP investments and building supplemental investments for your retirement years. Another reason for those future thank you’s.
For final thoughts on investing versus borrowing, let’s move on to number three.
3. Borrow against tomorrow.
Hopefully we’ve made the point that getting rid of installment debt is an important cornerstone to the habits that build wealth. But now I want to talk about the bad idea that is taking a TSP loan.
I get it. life happens. Without sufficient savings, you are very vulnerable to a financial setback that might mean a TSP loan is your only option. But as I wrote in my introductory piece, this needs to be a last, last, last resort.
When we borrow, we must pay more. That is a given for all debt. Interest paid eats wealth. But with a TSP loan, you can actually be losing twice. Not only will you be repaying the loan plus interest, you will be missing out on market rates of return while you do so for the borrowed amount.
Ok Jen, explain that.
The funds that secure the TSP loan are transferred to the G fund. The rate of interest you pay will more or less match the rate credited to the G fund. BUT, you will no longer be invested in the equity funds.
Why does this matter? The historical rate of return for the G fund is 4.68%. Now compare that to the historical rate of return for the C fund at 10.59%. A 6% delta over 15 years on $100,000 is approximately $139,000. That’s a lot to lose and try to make up. Add to that the strong likelihood that you will lose ground to inflation based upon the G fund return and you can see why I say TSP loans are best avoided.
So, this wraps up my dive into the first three easy ways to ruin a federal retirement.
Wow Jen, this column was kind of preachy.
I know, this is not my favorite tone for sharing how to build the retirement you deserve, but I look at it like “eating our vegetables”; not as much fun a dessert, but a great way to be healthy and strong.
In my next column, I will tackle 4 through 7 which are Silo Save, Underfund TSP, Lose your balance and Bad TSP strategy.
Thanks for reading this and I look forward to helping you have a great financial life.
The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jennifer Meyer and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.