One of the biggest fears and questions for retirees is “Will I run out of money in retirement?”. Understandably, this is a fear of just about everyone (unless maybe you are Warren Buffet). Even though FERS benefits put federal employees miles ahead of most private sector employees when it comes to being prepared for retirement, feds are not out of the woods yet.
For many feds, the period that puts pressure on the rest of their retirement is the time between retirement and starting social security. According to a report by OPM in 2017, the average retirement age for feds is 61. This means that the average retiree will have at least 1 year before they are even eligible to start social security. And for many feds, it makes sense to delay starting social security until closer to age 67 or even 70 to get the dramatically increased monthly benefit.
This means that the average fed is going to have 6-9 years between the day they stop working and the day they get their first check from social security. During this period, most feds are going to be relying on their other two main sources of income: their pension and TSP.
The problem starts when many feds overestimate how much of their pension they will actually see. For example, let’s say John, our retiring federal employee, has a high-3 of $100,000, 30 years of creditable service, and a multiplier of 1.1. This would make his pension calculation look like this:
$100,000 x 30 x 1.1% = $33,000
$33,000 feels like a great number but we have to remember that is his gross pension, not his net pension. To get his net pension, or the actual dollar amount that he’ll be able to spend, we need to take out things like the survivor benefit for his wife, FEHB premiums, and taxes. It might look something like this:
$33,000
-$3,600 : FEHB ($300 month)
-$3,300 : Survivor Benefit (10%)
-$4,950 : Taxes (Estimated at 15%)
Net Pension: $21,150
This means that he’ll actually see about $1,762.50/month from his pension. The rest of his living will have to be made up from his TSP. Let’s assume that he and his wife have living expenses of about $5,000 per month. This means that to sustain their lifestyle, they’ll need $3,237.50/month or $38,850/year from their TSP. Assuming Joe retired at age 61 and wasn’t going to start social security until 67, he’d need to take a total of $233,100 from his TSP to cover the gap.
And depending on how hefty John’s TSP was to begin with, this could be a devastating blow. Not only is that $233,100 not around to fund the rest of retirement but won’t have the opportunity to grow if it had been invested.
To solve this problem, some people decide to just start social security early but this has its own ramifications and in efforts to not make this article a mile long, I won’t go into the pros and cons of starting social security early in this article. There are a million articles on that. Suffice it to say, that for many people (but not everyone) it makes the most sense to wait to start social security until at least their full retirement age (between age 65-67 depending on when you were born) if not later and the question then becomes how to survive the gap.
Some continue to work, cut down their lifestyle, or do a reverse mortgage. But what makes sense for you really depends on your situation and goals. For some, their TSP balance is large enough to weather the storm and for others that might not be the case. You’ll have to look at the details of your life and decide what the best strategy is for you to survive the gap that could kill your TSP.
