Those who are most anxious about retirement seem to be the ones who have not properly established their retirement goals. Retiring can represent a complete change in lifestyle and identity. Many FERS/CSRS federal employees have been working for the government for over 30 years and they do not know themselves outside of their respective positions.
Establishing goals before retirement such as income goals, rainy-day fund goals, debt-payoff goals, how you potentially want funds to pass to beneficiaries, and funding retirement activities like vacations and hobbies will help make your retirement a success.
Income Goals
One of the most important goals to establish and have a plan for is monthly income. Monthly income is what you are physically living off each month, and inflation should be factored into your income goals.
The Federal Employees Retirement System (FERS) retirement is built around a three-legged income system where your sources of income are comprised of your pension, Social Security, and Thrift Savings Plan (TSP). FERS pensions do not keep up with inflation, so having a plan for not just immediate retirement income but also income for your entire retirement that can span over 30 years is crucial.
Cost of living adjustments (COLAs) do not start for FERS retirees until age 62 and then are computed as follows:
- If the increase in the CPI (Consumer Price Index) is 2 percent or less, the Cost-of-Living Adjustment is equal to the CPI increase.
- If the CPI increase is more than 2 percent but no more than 3 percent, the Cost-of-Living Adjustment is 2 percent.
- If the CPI increase is more than 3 percent, the adjustment is 1 percent less than the CPI increase.
- The new amount is rounded down to the next whole dollar.
The table below illustrates this:
| If the CPI is: | Then the COLA is: |
|---|---|
| <= 2% | COLA = CPI increase |
| > 2% and <= 3% | COLA = 2% |
| > 3% | COLA = CPI – 1% |
Unlike FERS pensions, Social Security gets the full increase of whatever the CPI-W (Consumer Price Index for Wages) is for the year.
Social Security is the “second” leg of the income stool and can be started as early as 62. Every year you delay taking your Social Security benefit, the monthly benefit increases, which could be used as a strategy to offset inflation in the future depending upon your income goals.
The ”third” leg of the income stool is utilizing your TSP for additional income. As previously discussed, installment payments can be set up to distribute a set amount per month. The annuity option or utilizing outside IRAs can produce additional income as well.
Having a strategy to accomplish your income goals using the sources listed above can make all the difference in retirement. By knowing how much income you will need to keep the same quality of life in retirement, you can then strategize around the right time to retire, start Social Security, and how to allocate your TSP based on your goals.
Rainy Day Fund
Once your income goals are solidified, the next important consideration is having funds set aside for any unknown expenses that can pop up in retirement.
A lot of people wonder how much is appropriate to have set aside for emergencies, and the common sentiment is to have 3 to 6 months of expenses put away for emergencies. However, this varies based on lifestyle, number of debts, and health status. It is advisable to look at your living situation and what amount would give you peace of mind to weather any “what-ifs” that could potentially come up in retirement.
Having additional funds set aside can also be utilized to offset inflation in the future.
Pay Off Debt
One of the biggest difference-makers heading into retirement is having debts paid off. Having no financial obligations is important because in most cases FERS retirement income is less than what your income is while you were working. Planning years before retirement can help in having bigger debts paid off, such as mortgages.
If you do want to pay your home off early using qualified funds (Traditional TSP, Traditional IRAs, etc.) you could incur potential heavy tax consequences for doing so, so taxes should be factored into your decision ahead of time, especially if considering taking large amounts out at once. Instead, you could make one extra principal payment per month which can help you pay off your home early and save on interest.
In some cases, paying off homes with lump sum distributions from Roth or non-qualified funds may not make sense because of opportunity cost. Opportunity cost has to do with what potential benefit you would be missing out on if another option is chosen, meaning, if you have a low interest rate on your mortgage, then taking funds from potentially higher interest-producing investments can be detrimental. That is because you would then be missing out on the earnings potential of the funds you used to pay off the debt.
Plan For Beneficiaries
Estate planning is an often overlooked aspect of retirement. Having your “affairs in order” can bring peace of mind knowing that if something happens your hard-earned money, real estate, etc. will go to the people and/or places you want in the most efficient way possible.
Making sure you keep your beneficiaries up to date with your TSP and IRAs is a great idea as well. Keep in mind that estate planning laws vary by state, so finding a reputable estate planning attorney in your area is advisable to utilize the instruments that will work best for your situation (trust, will, etc.).
Another important consideration for your dependents (spouse, dependent child) is what their financial situation would look like if something happened to you. Choosing one of the survivor benefit options for your FERS pension can help, as well as strategies around Social Security. Knowing what income goals need to be met for your dependents can help you decide the best options to choose as far as when to take Social Security, investment options, life insurance, and survivor benefit elections for your pension.
Retirement Activities
Having a plan for keeping busy can help the transition into retirement and be good for physical and mental health. A lot of retirees plan on going somewhere for vacation at least once a year, which can give you something to look forward to and take advantage of your “go-go” years.
Many retirees have a sense of a loss of identity. Many government careers are over 20 years, and it is easy to think of yourself most in the position you had while working.
A good way to find a new identity is through hobbies that you have done in the past or new hobbies that interest you. This could also be a good way to socialize, depending on the hobby.
Quite a few government employees wind up working a part-time job, to keep busy and to supplement their income. Working part-time allows retirees to choose a position that they want to do, and the outside income does not affect their pensions.
If you are taking Social Security and are under full retirement age or are receiving the FERS supplement, you will want to consider the income limits if you are planning to work. Knowing what kind of activities you will want to participate in retirement ahead of time allows you to know how much money to set aside and factor into your retirement figures.
Plan Ahead
Retirement does not have to be an anxiety-evoking experience. Establishing goals as to what you want your retirement to look like ahead of time will dictate the proper time to retire and give you a better idea of when you would want to start Social Security and how to best utilize your TSP. Staying busy in retirement, pursuing your passions, and relaxing will come much easier if you have a road map leading to the goals that you had set beforehand.
Investment advisory services offered through Integrity Advisor Solutions, LLC (“IAS”), an investment adviser registered with the SEC. Integrity Wealth is a marketing name for IAS. FedSmart Retirement and the above firms are not affiliated. FedSmart Retirement does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstances. Not associated with or endorsed by the Social Security Administration or any other government agency.
