What if you still were paid even though you stopped working? It used to be the norm. Working for the same company for 30 years on the promise of a pension enabled many people to retire without much worry.
However, from 1980 through 2008 employees with access to pension plans fell from 38% to 20% according to the Bureau of Labor Statistics. For those employees who do have access to a pension it can play a significant role in their retirement planning.
As a federal employee I am part of a tiered pension program. I also have access to a more traditional 401K type of account with matching contributions. The government’s 401k plan is called the Thrift Savings Plan.
Make It Count
In Part One of this series, I discussed some of the details of how the federal pension plan works and what type of benefit a career fed might walk away with once they retire. (Remember though, even with a pension, if you don’t manage your expenses and save for retirement you might still find yourself greatly limited with what you can afford later in life.)
Federal employees are given access to some of the better retirement “tools” out there. Having access to a TSP and pension plan can enable a household to create a nice retirement for itself if it takes advantage of them. So, how might it play out for someone?
In Part One we met Walter, who at the age of 37 was making $112,600 dollars – just about the average for Washington, DC, area feds. We calculated his estimated pension benefits for a retirement at age 57 with 28 years of service and age 59 with 30 years of service.
One of the big factors in doing this was estimating the growth of his income in order to determine his high-3 average salary. Shown below are the estimates.
What are your expenses?
Just like in Part One of “How Much Do You need To Save,” in order to determine Walter’s retirement savings goal we need to start by figuring out his expenses.
After running through his budget, Walter determines that in order to achieve a comfortable retirement he will need $90,000 a year.
His bare minimum expenses are estimated to be around $65,000/year, but he has elected to add an additional $25,000 a year for travel, fun, and low-stress living.
How much will Walter have to spend?
Walter’s main source of retirement savings besides a few months’ worth of cash reserves is his TSP plan. At the age of 37 he has saved up $150,000 in his TSP account.
He plans to contribute $15,000 a year to include his 5% agency match. What will his account balance be at age 59?
At 5% return =$1,048,788
At 6% return= $1,242,451
At 7% return= $1,477,371
I’m going to stop at 7% and use that number for this scenario. Call me bullish if you want. Or bearish maybe depending upon your point of view.
Let’s talk Social Security
I found this Social Security calculator. After plugging in Walter’s information and selecting “today’s dollars,” it calculates his benefit starting at age 62 to be $1,939/month.
When I checked the box to include future dollars which accounts for inflation his number comes out to $4,972/month!!! That’s almost $60,000 a year. Wow, I’m suspicious of the calculation.
Or maybe I’m just ignoring the power of inflation.
Either way, I’m going rogue and going to use my own number for this exercise.
I’m not wanting to use too big a number for Walter’s social security benefit given:
- some level of uncertainty over the future of that program, and
- the fact that today’s social security estimates are provided with a statement citing that “future reductions may be required.”
I think using a smaller number would be more realistic, just in case.
I’m also not going to debate in this post the idea of collecting Social Security at age 62 versus waiting until later years.
So after consulting with my ReachingTheCrest committee (me and my dog) I have elected to use a benefit of $1,800 a month or $21,600/year for Walter in this scenario.
Adding It All Up With Some Simple Math
We will take Walter’s estimated pension, Social Security estimate (albeit a questionable one at that), and an annual withdraw from Walter’s retirement savings.
We can now make a reasonable determination on when or if he will be able to meet his projected living expenses in retirement.
By lining up Walters estimated pension incomes we can determine what he will need from his TSP account every year.
The first circled number of $33,682 is the pension amount if Walter decided to retire at age 57. What becomes very clear in this scenario is Walter has not saved any money outside of his TSP except for a few months of cash savings.
Also, pulling money out before 59 ½ years of age can bring penalties.
Sometimes You Just Need To Pay Those Taxes
Without money saved outside of a retirement account, Walter is limited. That is, limited in being able to bridge the gap between his pension and his expenses.
Even if he were to reduce his expenses by eliminating the “fun” budget he will fall well short.
This is an important consideration for anyone wanting to retire before the age of 59. You will need to have income or savings outside of a traditional retirement account. There are ways around having to pay the penalties.
However, for the average person, the safest and easiest way to get around the penalties of early withdrawal from a retirement account is to simply save via taxable savings or brokerage accounts.
The second circled number of $56,874 is Walter’s estimated pension amount starting at age 59. At age 59 he is now more easily able to withdraw from his retirement account without penalty. This now allows him to cover the difference between his pension and expenses.
Withdraw Rates Matter
The below chart shows that he is able to reduce his withdrawals to a very safe amount because of his pension.
No 4% withdrawal rate for Walter. At 2.5%, Walter is able to pull out almost $37,000 a year from his $1.4 million dollar retirement account. That balance will continue to grow in the coming years.
At age 59, between his pension and TSP, Walter has more than his required expenses. Even when his pension is reduced to $40,422 at age 62 (Supplement goes away), he will be able to turn on his social security if he should desire and have almost $9,000 a year over his desired yearly income.
If he opted to not begin collecting Social Security, he may even consider raising his withdrawals from the TSP for a year or two. The bottom line is that he has options.
How many out there are hanging out in their Federal job for the pension that will one day come?