“Will my Thrift Savings Plan savings and other assets be sufficient to support me in retirement?” This is a
question that everyone who ever hopes to retire – or remain retired – must answer correctly.
question that everyone who ever hopes to retire – or remain retired – must answer correctly.
Here’s a basic way to assess your retirement readiness from a financial perspective. It will help you
determine whether retirement is a possibility and whether more work is necessary to accurately answer
the question.
The reliability of the result will be no better than that of the information you feed into the process. Making
sure that this information is as accurate as possible is key. The six steps:
- Estimate your sources of guaranteed income in retirement – for example, your federal annuity, Social
Security payments, private pension benefits and trust payouts. The point here is to understand, in today’s dollars, about how much you’ll have coming in on a regular basis, either before or after taxes.To illustrate, I’ll build a hypothetical example as we go. John wants to retire in three years at age 60. He receives an estimate of his Federal Employees Retirement System annuity from his human resources office, which indicates that he can expect to receive about $2,000 per month, beginning on his desired retirement date. He also checks his last Social Security benefit statement, which says he can expect another $2,000 per month, starting at age 62. John also will be entitled to about $1,800 per month from the FERS special retirement supplement from the time he retires to the time he reaches age 62 and becomes eligible for the Social Security benefit. So John expects to receive about $4,000 per month, or $48,000 per year, in retirement, adjusted, at least mostly, for inflation. - Determine how much you will need or want to spend in retirement. John takes his current gross income of $80,000, subtracts his $10,000 annual TSP contribution then subtracts 25 percent of the remainder for taxes and figures out that he’s currently spending about $53,000 per year. His mortgage will be paid off in a few years, but he plans to travel and help pay for his grandchildren’s college expenses, so he’s comfortable planning to continue with this level of spending into the foreseeable future.
- Estimate the TSP withdrawal amount you’ll need each year. To do this, subtract the retirement
spending need from the estimated retirement income. This can be done pre- or post- tax, but make sure that both numbers are expressed in the same way. After taxes, John expects his $48,000 annual retirement income to produce about $36,000 in spendable income. Subtracting his $53,000 retirement spending allowance from this income, he sees a shortfall of $17,000 per year, after taxes. This is the amount of money he’ll need from his TSP account each year, after taxes and adjusted for inflation.But TSP withdrawals are subject to income taxation. To account for this, John divides the $17,000 per
year shortfall by 0.75 to estimate the TSP withdrawal required to produce the shortfall amount at his 25 percent tax rate – he’ll need to withdraw about $23,000 per year to cover the shortfall and pay his taxes - Estimate your TSP balance at retirement. John estimates what his TSP balance is likely to be at the time he retires by adding his planned contributions and his agency’s contributions to his current balance. Since he’s only a few years from retirement, he plays it safe and ignores possible investment growth. John estimates his TSP will contain about $500,000 when he retires.
- Adjust for any large expenses or receipts. John expects to spend about $50,000 for a wedding during the next 10 years, so he reduces his expected TSP balance to $450,000. If he was expecting a large inheritance, he would add the amount to the balance, instead.
- Calculate the initial withdrawal rate. John divides the $23,000 annual withdrawal in the first year of retirement by the $450,000 adjusted TSP balance and realizes that this represents an initial withdrawal rate of 5.1 percent – somewhat above the safe range for retirement income withdrawals. If his calculations had produced an initial withdrawal rate of less than 3 percent, he could probably proceed without worry.
Retirement with an initial withdrawal rate of 3 percent to 5 percent can probably be managed with some
careful planning, disciplined behavior and the appropriate investment asset allocation. Anything over 5
percent will require some advanced analysis and management to work safely, if it can work at all.
This preliminary assessment is a useful tool for those who would like to retire within about five years or
who are retired. It can be used by younger workers, but will produce less reliable results since the
estimates of future values will be more prone to error.
Written by Mike Miles
For the Federal Times
Publication October 8, 2007