This would seem to be a reasonably straightforward question to answer. On the surface, it would appear a federal employee could add up his assets (TSP, IRA’s, savings, etc.) then subtract his debts (mortgage, credit cards, car loans, etc.), and voilà…he would have the result.
Not exactly! This will tell you your current net worth, but the question as to how well off you are would still remain unanswered. To answer this, you must shift your focus towards how much is actually needed for retirement.
The Million Dollar Misconception
“A MILLION DOLLARS!” Just mouthing the word “million” grants a satisfying sensation as it rolls off the tongue, and one million dollars is a large amount of money; I don’t care who you are!
Nonetheless, one million dollars does not provide the financial security that it used to. While it may be one of the goals some feds will shoot for, it might not be enough savings to sustain them throughout their retirement years.
Some of us more mature (sounds so much better than older, doesn’t it?) individuals remember when a million dollars was huge money.
In 1970, I was a young pup in a small farming community in East Central Missouri. I remember hearing about a neighbor who sold his farm and retired to Florida. The scuttlebutt was that he would walk away with a cool million and would never have to worry about money again. I don’t know what happened to that neighbor over the years, but there is a good chance he never did worry about money again.
I share this story to make a point: I wonder if we are sometimes guilty of seeing things through that old lens of yesterday, because without a doubt, a million dollars just isn’t what it used to be.
With the longer life spans we enjoy today, the maximum annual withdrawal amount from retirement assets (TSPs, IRAs, etc) generally accepted by the financial industry (as a kind of rule of thumb)is 4%The concept is, if no more than 4% is withdrawn each year, it will hopefully carry one from retirement to the end of his life.
If we use this standard, 4% of $1,000,000 is $40,000 per year. ($1,000,000 x 4% = $40,000).
But what is $40,000 worth today? According to dollartimes.com‘s inflation calculator, $40,000 in 1970 would be equivalent to withdrawing $266,560 in today’s dollars from retirement assets.
Note: according to the same calculator, $1,000,000 in 1970 is equivalent to $6,664,005 in today’s dollars.
After taking inflation and investment risk into account, predicting the amount of income and savings needed to maintain one’s lifestyle during retirement is a daunting task.
3 Reasons Federal Employees are Looking to Mitigate the Number of Missed Targets in Their Retirement Plan
1. Working later in life out of necessity
It is one thing to work late in life in order to keep active and maintain social interactions with others; it is quite another to work because there is more month than money.
2. Unable to maintain a desired lifestyle
In my experience, retired feds spend 10-20% less when they retire than they did while they were working. This expense reduction doesn’t appear to alter the retirees’ lifestyles. This type of savings is likely only a reduction in adding to retirement savings and work-related expenses and is an entirely normal and a satisfactory post-retirement outcome.
On the flip side, what federal retirees are looking to avoid is making cuts due to financial necessity and not organically or by choice. According to CNN Money, “One rule of thumb is that you’ll need 70% of your annual pre-retirement income to live comfortably.”
3. Moving in with family due to income issues
I love my kids and I cherish my grandchildren very much. Nevertheless, the thought of living in their homes late in life makes my stomach churn just a bit…Yuck! I understand many families find this arrangement pleasant and preferred, and I don’t mean to disparage them or their choice. It is just NOT for me.
5 Targets Often Missed
- Inflation is, in my opinion, the number one missed target in preparing for retirement. The rising cost of goods and services is the reason why it would take over six million dollars in 2019 to have the same buying power as only one million dollars had in 1970. According to dollartimes.com, inflation averaged 3.95% from 1970 to 2019.
- Overestimating long-term growth of investments – No one knows what the markets may yield in the future for retirement savings. But, overestimating investment increases could lead to an income shortage later in life.
- Assuming fixed income (federal pension, social security, etc.) will keep pace with inflation. I would be greatly surprised if this happens. Ask a retired person on a fixed income if her Cost of Living Adjustments (COLA) have kept up with her actual rising living expenses.
- Underestimating new expenses.
- Potentially the most devastating miss is feds simply not knowing what they don’t know. It should be noted that federal employees planning their own retirement are not alone here. Intelligent, experienced and caring financial advisors can have their arrows fall short of this target as well. There are more moving parts to a federal retirement than most Americans experience which may throw off an otherwise great advisor (who doesn’t focus on federal retirements) or adept feds planning on the DIY approach.
Additional Steps to Take
So now what? We have identified several obstacles to learning how much you are worth which could be a critical component to any retirement plan, but please understand, these impediments probably won’t be the entirety of the hurdles most feds will have to deal with. Since we know that no two feds are precisely the same, your list of issues will almost certainly be different than others in your office.
There are tools and resources out there to help account for many of the more common barriers federal employees could share. Just a few of them are:
- OPM.gov – OPM has put together a trove of information on its website including several useful tools such as retirement information for CSRS, FERS, several insightful publications, calculators, etc.
- For more basic assistance, Calculator.net has a helpful retirement calculator that could provide some ballpark retirement savings and income estimates.
- Silverlight Financial (My office) donates a free, no-obligation 1-hour Federal Retirement Readiness Review to federal employees.
- AARP has a modest 10 question ready for retirement quiz.
A Positive Note
Ok, so maybe a million dollars can’t buy what it used to, and perhaps it has even lost some of its luster over the past 50 or so years. But it is still an admirable and worthwhile goal.
Here is a fun exercise. As a federal employee, you have more than just what you save for your retirement to look forward too. You also have a pension, and FERS employees may qualify for Social Security.
Do a little research to find out what your income will be from these sources when you retire. When you know those annual figures, divide them by 4%, and you will learn their values in whole dollars. For many readers, I suspect this number will be in the million-dollar-plus range.
Example: $40,000 per year in income from fixed sources (SSA or federal pension) divided by 4% = $1,000,000)
The answer to how well off you are is identifiable and out there! However, be cautious not to fall into the trap of only learning your net worth.
