Retirement Strategy for Federal Employees: How Much Should I Save?
By Kaleb Robuck
"Will I outlive my retirement money?"
This is one of the top fears for people who are starting to prepare for their retirement years.
Determining how much money you need in retirement is a process. It shouldn't be a number that you pull out of thin air.
The process should include looking at your current financial situation and developing an approach based on your goals, time horizon, risk tolerance, and benefits offered through your Federal retirement plan. The process should take into consideration all your potential sources of retirement income, and also may project what your income would look like each year in retirement.
We all have our "blue sky" visions of the way retirement should be, yet our futures may unfold in ways we do not predict. So, as you think about your "second act," you may want to consider some life and financial factors that can suddenly arise as a Federal employee.
You may see retirement as an extension of the present rather than the future.
This is only natural, as we all live in the present, but the future will arrive. The costs you have to shoulder later in retirement may exceed those at the start of retirement. As you may be retired for 20 or 30 years, it is wise to take a long-term view of things.
A common rule of thumb is that retirees should be able to replace 80% of their pre-retirement income in retirement in order to live a similar lifestyle. However, everyone is different, and that percentage can go up or down depending on the person, so it’s important to evaluate your specific situation.
You may have a health insurance gap.
If you retire before age 65, what do you do about health coverage? You may shoulder 100% of the cost. If you meet certain conditions, however, you may be able to keep your federal employee health benefits (FEHB) at retirement. Learn more about these conditions here.2
The thing Federal Employees need to keep in mind is health insurance isn’t free and it isn’t cheap, so it’s important to budget appropriately.
Another possibility to consider is suppose you become disabled or seriously ill, and working is out of the question. How will you make ends meet?
Age may catch up to you sooner rather than later.
You may stay fit, active, and mentally sharp for decades to come, but if you become mentally or physically infirm, you need to find people you can trust to manage your finances.
You could be alone one day.
As anyone who has ever lived alone realizes, a single person does not simply live on 50% of a couple's income. Keeping up a house or even a condo can be tough when you are elderly. Driving can also be a concern. If your spouse or partner is absent, will someone be available to help you in the future?
These are some of the blind spots that can surprise us in retirement.
They may quickly affect our money and quality of life. If you age with an awareness of them, you will be able to manage the outcome better.
Much has been written about the classic financial mistakes that plague start-ups, family businesses, corporations, and charities. Aside from these blunders, some classic financial missteps plague retirees.
Calling them "mistakes" may be a bit harsh, as not all of them represent errors in judgment. However, whether they result from ignorance or fate, we need to be aware of them as we prepare for and enter retirement.
Timing Social Security & Other Retirement Income.
As Social Security benefits rise about 8% for every year you delay receiving them, waiting a few years to apply for benefits can position you for higher retirement income. Filing for your monthly benefits before you reach Social Security's Full Retirement Age (FRA) can mean comparatively smaller monthly payments.
Your workplace retirement account can play a critical role in your overall retirement strategy. Federal Employees are lucky because most current ones receive Social Security and two pension plans: a defined benefit (DB) through FERS and a Thrift Savings Plan.3 However, some people have gone further with such accounts than others, especially recently.
It’s important to have a strategy on how to pull from your different retirement income buckets to make it the most cost-effective for you.
Managing medical bills.
Medicare will not pay for everything. Unless there's a change in how the program works, you may have a number of out-of-pocket costs, including dental and vision care.
Actuaries at the Social Security Administration project that around a third of today's 65-year-olds will live to age 90, with about one in seven living 95 years or longer. The prospect of a 20- or 30-year retirement is not unreasonable, yet there is still a lingering cultural assumption that our retirements might duplicate the relatively brief ones of our parents.
You may have heard of the "4% rule," a guideline stating that you should take out only about 4% of your retirement savings annually. Some retirees try to abide by it, but others withdraw 7% or 8% per year. Why is this? In the first phase of retirement, people tend to live it up. More free time naturally promotes new ventures and adventures and an inclination to live a bit more lavishly.
Talking About Taxes.
It can be a good idea to have both taxable and tax-advantaged accounts in retirement. Assuming your retirement will be long, you may want to assign this or that investment to its "preferred domain," which means the taxable or tax-advantaged account that is most appropriate for it as you pursue a better after-tax return for your entire portfolio.
Federal employees are taxed on their retirement pension at ordinary income tax rates, so it is important to plan for.4
Retiring with debts.
Some find it harder to preserve (or accumulate) wealth when you are handing portions of it to creditors.
Putting college costs before retirement costs.
There is no "financial aid" program for retirement. There are no "retirement loans." Your children have their whole financial lives ahead of them.
Retiring with no investment strategy.
Expect that retirement will have a few surprises; the absence of a strategy can leave you without guidance when those surprises happen.
These are some of the classic retirement mistakes. To help you avoid them, take some time to review and refine your retirement strategy with the help of a trusted financial professional.
Dan Miller, Kaleb Robuck and Marcus Taylor are investment adviser representatives of, and securities and advisory services are offered through, USA Financial Securities Corp. Member FINRA/SIPC. A Registered Investment Advisor located at 6020 E Fulton St., Ada, MI 49301. Miller Financial Group is not affiliated with USA Financial Securities.