By: Jesse Black
What is the key to retiring successfully? How much money should you have in your TSP? Should everybody have $1,000,000 in their TSP when they retire? How many commas, how many zeros should you have in your thrift savings plan? Should you have all your debt paid off?
Today let’s go over the number one thing that you need to look at, in my opinion, for you to be successful in retirement. That number one thing is Income, Income, Income. When I talk about income, I mean net take home income after deductions, after taxes, and health insurance. Net income is the amount that is actually being deposited into your bank during retirement.
Everyone is different and unique in their retirement needs. It ultimately boils down to your income and what you’re taking home. I’m going to give you a few tips on how to look at your specific situation, to make sure that you have enough income, and how to plan for retirement when you’re a looking at it through the lens of income. Looking at income is going to make it a lot easier to plan for retirement, rather than having a certain dollar amount that you’re shooting for. Stop comparing yourself to your friend who has $1,000,000. I’ve seen people that have $1,000,000 that struggle in retirement and don’t have enough income. Then I’ve seen other people who have maybe $300,000 in their TSP and they’re really comfortable because they have plenty of income, and money for emergency discretionary expenses.
Income is where the rubber meets the road. It’s what you’re physically living off of each month that matters. I think we all know those people who have saved millions of dollars in their retirement funds, didn’t know how much to use of the funds then they’ve passed leaving it to someone else. It is all about income. What you’re living off of truly is what matters and when I am meeting with clients; that’s what it’s all about. I get asked the question, “When’s the appropriate time to retire?” It’s all based on your income needs and what you physically need to live off of. Some people can afford to retire at 55 or 57 because of the amount of income that they’re looking at. Some people have $1,000,000 at 55 and they can’t afford to retire because they’re not going to be able to generate enough income from all their income sources in retirement. So it is not a dollar amount in the TSP. It’s not certain number of zeroes. It’s how much income do you need and how much income can you generate?
Calculating your pension, your supplement and your Social Security is all well and good, but remember, all those numbers are gross. Even when you’re calculating on the GRB platform, that gives you gross figures. What you want to look at is your actual take home pay. When you look at it, especially if you plan ahead, there’s definitely the opportunity to take home the same amount of income that you were taking home while you were working and still have additional assets for emergency discretionary purposes or offset inflation.
The first thing you want to look at when you’re looking at your income is to figure out your gross figures. You want to know what you’re going to get when you’re first eligible for your pension and your supplement income, whatever you’re going to be entitled to when you retire. Then you want to look at your net figures. You want to figure out what your federal taxes are going to be. Find out if your state is going to tax your pension. Does it tax your Social Security? Are you going to have a survivor benefit coming off your check? What’s your FEHB cost? Will you have dental and Vision insurance? Then your FEGLI, are you going to have some life insurance in retirement? Figure out what those deductions are going to cost you. Now, keep in mind that sounds like a lot of deductions, but it is way less than what you had when you were working. You don’t pay FICA taxes anymore, you don’t pay Medicare taxes, you’re not paying FERS, you’re not making TSP contributions and more.
And for FEHB, keep in mind, if you have a family plan, but you’re not retiring for three or four years, by then your children might be off of it. So look ahead and see what your situation is going to be when you’re retired. Not necessarily what it is right now. Things can change when you’re retired. If you are on a self plus one or a self only, and you’re going to be on the same plan in retirement, the cost a retired person is paying will most likely be the same as an active employee.
You get these gross numbers if you calculate with the GRB or HR then will often show you some net figures, too. I see that almost always those numbers are actually incorrect. They don’t know what your actual tax bracket is going to be, what your federal taxes are, if you are married or you’re filing joint, they don’t know what your household income is with your spouse. So your net figures sometimes can be hard to figure out, and that’s why it can be good to work with a financial professional who has experience with that.
To figure out what income you need in retirement, first you want to look at your net take home pay is while working. If you’re close to retirement, you want to get an idea of what is deposited into your account every single pay period. Then multiply that by 26 (or the number of pay periods per year) and then divide it by 12, to get your monthly take home pay. Then you figure out what your take home pay is in retirement from your two main sources and then what the difference is from your take home today. Based on that, you can see how much more you will need to make, to get to the same amount. That number is called your income gap. The income gap is the difference between what you will get and what you need to maintain the same lifestyle. Let’s say for example, you calculate the numbers and you figure out you need $1,000.00 net more per month from your assets to take home the same amount of income and maintain the same lifestyle going into retirement. Based on that, now you can figure out how much you need in the TSP or retirement assets to be able to generate $1000 a month.
This can help you figure out when to retire, too. If there’s not enough in the TSP to get you there, maybe that means you need to work a couple of extra years. Maybe being 62 and getting the higher pension computation is going to make all the difference. If you need to retire sooner for health issues or you need to take care of a family member, maybe you’ll need to make some lifestyle changes to lower your monthly expenses, so you don’t need as much monthly income.
Now you know your income gap and you’re able to decide if you have to work until you’re 65 or maybe you can retire at 57. That income gap helps you figure out how much you need in your TSP to generate that monthly income to close that gap and still have some money left over for emergency discretionary purposes, to offset inflation in the future, if you need long term care, if you want to buy a vacation home, etc. But now you know approximately how much you should have in your TSP. Not everybody should have $1,000,000. It’s specific to you, your goals, your needs and what your income gap is.
If you look at things and you’re barely going to have enough in your TSP, and you have a pretty good chance of running out of money based on your balance and how much you need per month, you still may want to work longer. You have to account for inflation, and the fact that you could live a long time, and emergencies that could pop up and cause withdrawals from your TSP. This can make your income gap more of an issue with your balance in your TSP.
Keep in mind you have the three legs of income. You have your pension, Social Security and TSP. When to start Social Security is a very personal decision. Not everyone should start it when they’re first eligible. If you can delay, there are positives to that. There are also reasons to take it when first eligible. Again, it’s a decision specific to your situation. These are all things to keep in mind and when it comes to retirement income.
Knowing the income gap and what you need from your assets in retirement, then helps you decide how to invest your TSP. If you have a very healthy balance and you’re going to have more than enough to fill that income gap, plus emergency discretionary expenses, and you’re going to be pulling that next year, you don’t need to be as risky as somebody who’s 10 years out from retirement. The person 10 years out and still needs more to cover their income gap in the future may need to “chase double digit returns” and have more risk in their allocation and try to have a healthier balance when they need to use it. So again, that income gap ultimately determines when you should retire, when you should take Social Security, how you should invest your TSP and your retirement assets.
You can see why income and having a really good idea of what your actual take home income in retirement is, really is Rule #1. There are a lot of things to consider to help you calculate and have an approximate take home income rather than just an approximate gross income. The best way to do that is to do it with a fiduciary financial advisor, in my opinion. A fiduciary is someone who is going to have your best intentions in mind and act on your best behalf. They’re going to try and help you make financial decisions to help you overcome that income gap, still have money for emergency discretionary expenses, offset inflation, have money for long term care, or whatever life might throw at you in retirement. In my experience, a lot of people retire and if they haven’t worked with the financial professional, they’re a little bit caught off guard because they haven’t made a plan for variables. Hard times hit and now they lost 30-40% of their portfolio. They’re at risk of running out of money. So you really want to create a specific retirement plan to you and your income that you need in retirement.
So Rule #1… Income, Income, Income. That is what allows somebody to live confidently in retirement and maintain the same lifestyle. They have enough income when they first retire and it’s an income that they feel very confident it’s going to last the rest of their life. That confidence comes with creating a specific plan with a financial professional. Figure out what income you need in retirement, then create a plan to generate that income.
More Info: https://www.opm.gov/retirement-center/fers-information/computation/
FedSmith Article: https://www.fedsmith.com/2023/02/23/8-milestone-ages-for-federal-employee-retirement-planning/
Tags; FERS, Federal Retirement, Federal Retirement Planner, FedSmart, FedSmart Retirement Planners, Financial Advisor For Federal Employees, Thrift Savings Plan, TSP, Jesse Black, Jesse Black Financial Advisor, Jesse Black Financial Planner, Jesse Black Federal Retirement, Steven Puckett, Steven Puckett Federal Retirement, Steven Puckett Financial Advisor, Steven Puckett Financial Planning, Federal Employee Retirement Planning, Federal Employee Retirement Income
