When thinking about and preparing for retirement, many federal employees are uncertain regarding the process of determining just how much income and savings they will need to survive and even flourish.
Some will focus on an investment number, the amount they would like to have accumulated in their retirement savings (such as their TSP, IRAs, Roths, etc.). Others may hone in on their high-3 and the number of years they have in service, concentrating on their federal pension.
But there is perhaps a more accurate way of determining when you may be financially ready and able to retire. That process consists (in part) of asking specific, pertinent questions designed to uncover YOUR financial needs during retirement.
Backing Into Retirement
During a recent Federal Employee Retirement Review, I met with Sonya Banksmart (not her real name), a soon-to-be retiring FERS employee. Sonya was 60 years old, single, and had 28 years in federal service. Sonya wanted to retire within a year, but based on the amount of retirement savings she had, Sonya didn’t believe she would be able to until the age of 65.
Instead of first looking at her likely pension amount, Social Security estimates, and retirement savings, we took a “back in” approach to determining a possible retirement date for Sonya. We went through a few simple questions designed first to assess her retirement needs and desires. This course allowed for a better understanding of her long-term income requirements.
We thus created a new jumping-off point in developing a plan of action. We were able to evaluate and estimate her monthly outlays as well as Sonya’s potential income sources, including her federal pension, SSA, and retirement savings.
By first determining needs and desires, we were able to take a more holistic retirement planning approach. We, therefore, nullified Sonya’s initial methodology of merely seeking to reach a predetermined amount in her retirement savings.
Through this review, we learned that Sonya would need less monthly income during retirement than she currently requires while still working. It was revealed that she would have an excess of approximately $800 per month at age 62 if she retired at 61. This calculation considered the loss of her Social Security Offset when she turns 62.
Importantly, this excess would be available without turning on Social Security income or withdrawing from her retirement savings when Sonya first retires, thus potentially allowing Sonya to have additional income streams she can turn on later in retirement, and only when she would need them due to rising costs.
Retirement Questions to Ask
Below are some of the questions covered with Sonya that may also help in your retirement planning.
Can you visualize your future?
When you retire, do you hope to start a new career? Perhaps you see it as a time to travel. Maybe your most exciting plan is to spend more time with family and friends. When you have a vivid picture of your retirement future, you can begin to give those objectives a monetary value.
Example: Say a piece of the plan is for you and your spouse to visit family in Ireland once per year for two weeks. By doing a little research, you could determine the cost (in today’s dollars) of such an annual trip. Once you have done all your research (costs of travel, hotels, sites, food, etc.), let’s assume that you figure that this trip for two would cost $9,000. You can now add this annual expenditure to your monthly outlay budget. ($9,000 ÷ 12 months = $750 per month). This $750 monthly expense should now be included in your retirement plan.
What are those primary life goals you want to accomplish during retirement?
If you could only get four or five things done in retirement, what would they be? Answering this question might lead you to compile a “short list” of life goals, and while they may have nothing to do with money, the financial decisions you make may be integral to pursuing them.
Who do you wish to share your time with?
Here is another profound choice you get to make in retirement. The quick answer to this question for many retirees would be family or friends. Are they local, or should you consider travel costs in your retirement plan so you can visit them as often as you would like?
Do you have or wish to start any expensive hobbies?
Hobbies may be one of the most enjoyable aspects of retirement. An easy example is golf. Many working stiffs don’t get to spend much time playing golf. However, retirees may find that the time they have available for golf is wide open.
Depending on the location, as well as other factors, playing golf regularly can become very expensive. If this is a retirement goal, check around with some different courses to determine how much playing will cost you. Then, as we did with the annual trip to Ireland, add that expense to your monthly budget.
Mortgage Questions
- Do you own your home?
- Do you plan to downsize after you retire?
- How much debt is left in your mortgage?
- What is your interest rate?
- When will your mortgage be paid off?
- How much will you need to pay annually in escrows (taxes and insurance) after your mortgage is paid off?
Many folks think that when they retire, they should pay off the remainder of their mortgage balance. Now, emotionally, that may very well feel like the best option. However, it may NOT be the best idea financially. I would argue that mortgage interest rates compared to anticipated investment rates of return should be compared and considered before paying off that mortgage.
Additionally, taxes may also be a factor. If you plan to take money from your TSP, for example, remember those funds have never been taxed. When you remove your retirement savings to pay off a mortgage balance, those funds may be taxable at standard income rates. This could be quite costly, especially with more significant mortgage balances.
Depending on your answers, you can hopefully determine how your property costs will impact your retirement plan.
What inflation rate should you use?
This is, of course, speculative. Yet, ignoring inflation when planning for your retirement future could be a big mistake.
Merriam-Webster describes inflation, in part, as: “a continuing rise in the general price level…”
According to US INFLATION CALCULATOR, inflation during the 2020s has been 21.4%, which equates to about 6.11% annually. (21.4 ÷ 3.5 years = 6.11). They also show that from 2000 to today, inflation has been 82.4%. That would equate to 3.5% annually. (82.4 ÷23.5 years = 3.5).
It is hard to estimate inflation rates; it is a moving number that measures at least some of our daily expenses, and it is a vital component that significantly influences how we live. Give it some thought, but pick a number you feel comfortable with.
I tend to overestimate inflation rates, siding with a more cautious approach. I currently use 4% when assisting my clients in planning long-term retirement needs. This gives us a starting point that we may adjust later if needed.
Could you leave a legacy?
Many of us would like to give our kids or grandkids a good start in life, but leaving an inheritance can be trickier than many realize. Tax laws are constantly changing, and the strategies that worked years ago may have more limited benefits today.
Note: Consult your tax or legal professional before modifying any part of your overall estate strategy.
How are you preparing for retirement?
This is the most critical question of all. If you feel you need to prepare more for the future or reassess your existing strategy in light of recent changes in your life, consulting with a financial professional experienced in federal retirement approaches may offer some invaluable guidance.
Things to consider when searching for a reliable financial professional:
- Five years or more of experience as a financial advisor – I urge you to ensure a rookie advisor isn’t cutting their proverbial chops on your financial future.
- Focused on federal retirement – Some advisors will tell you that your federal retirement isn’t far removed from the typical non-federal retirement. This belief may indicate that the advisor has little knowledge about your retirement and may be ill-equipped to help you develop a solid and comprehensive retirement plan.
Some questions to weed out advisors that are not (in practice) focused on your federal retirement program:
- Ask them to explain the difference between CSRS and FERS retirement systems. (This should be an easy answer for advisors focused on federal retirement).
- Ask them to tell you how many federal employees they currently work with and what percentage that number is of their “book.” (I would suggest looking for an answer of 50% or more).
- How many years have they focused on federal employees’ retirement planning? (My suggestion again would be 5 years or more).
- Ask if they know how to calculate a FERS employee’s retirement pension/annuity. Bonus question – do they know how to figure out a FERS employee’s Social Security offset?
These simple questions should allow you to determine if you have found a knowledgeable and experienced advisor to work with.
Final Thought
Asking the right questions could make all the difference in not only your retirement plan but also your financial success. There will undoubtedly be more questions you will uncover (either as a DIYer or working with a financial professional) when planning your retirement. Hopefully, however, the questions outlined here will provide you with a solid starting point.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risks, including the loss of principal. No strategy assures success or protects against loss. Silverlight Financial, Infinity Financial Services, and its affiliates do not provide tax, legal, or accounting advice. This material is not intended to provide and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. For a list of states in which I am registered to do business, please visit www.silverlightfinancial.com. Securities offered through Infinity Financial, member FINRA/SIPC. Investment Advisory Services are offered through Infinity Financial Services Advisory, an SEC Registered Investment Advisor.
