How to Retire With a FERS Pension

how much income will your first basic annuity replace within your retirement income plan this is a question we get all the time in this video today I want to go ahead and address the following questions how to calculate your Furs basic annuity how it works how much that pension that basic annuity could be worth in portfolio dollars I think that's an interesting question what other source of income will you have to work alongside your annuity and how much income are you going to need right so it's another big question we have to answer and lastly how can we put this all together to make sure your money lasts throughout your retirement so I was talking to a client of mine recently he's coming up on 40 Years of federal service next year when he turns 62. he's excited he's planning to go out of course in the back of the napkin math for him looks like this 40 years times 1.1 percent multiplier because he's going out of 62 with 20 or more years of service and so he's going to get to 44 of his high three big number I'm super happy for him he's it's much just a very long career and he's worked hard now 40 years is a long Federal career OPM tells us that the average age of an employee retiring a career federal employee is 61 to 62 years old and the average length of service for the career federal employee is 25 to 26 years so if you work 25 years you're going to replace somewhere between 25 to 27 and a half percent of your pre-retirement high 3 salary depending on if you're able to get that 1.1 percent multiplier or not let's just back it up for a second we know the first annuities can't go like this years of service times your applicable multiplier times your high three salary and that multiplier is going to be one percent or 1.1 percent for most federal employees just depends if you make it to age 62 with 20 or more years of service that's when you can hit the 1.1 percent multiplier there are special category employees in different situations where you can go out with a different multiplier but we're going to keep it simple so we're talking about one percent or 1.1 percent of your salary times your years of service guaranteed for the rest of your life now the first basic annuity is unique for a few reasons first of all this type of benefit is not common for workers in the U.S anymore find benefit plans the pensions have kind of gone away they put the responsibility for saving on workers so it's a great benefit to have in your corner now the first annuity is unique for several reasons I just mentioned first of all is guaranteed by the federal government right that's powerful stuff and it has an optional Survivor benefit that's guaranteed for your spouse by the federal government it also has cost of living adjustments that can kick in at age 62. the contribution rate for employees is relatively low right it depends that's changed in recent years as new employees are now contributing more than some of the Legacy employees but it's still low and lastly a special retirement supplement may be available for employees to retire between MRA and 62. okay so that can be an additional it's based on social security so it's Unique for those reasons so how much could a fur's annuity be worth in portfolio dollars this is a question we get quite a bit people come in they say I don't think I can continue in my federal career anymore what would I need to do to replace this pension what do I need to save and invest how much do I need to earn I don't love this question but I do find it interesting and there's more than one way to look at it more than one way to answer of course now if you were to take an Investment Portfolio and give that balance to a private insurance and annuity company they'd pay you a guaranteed income stream for the rest of your life you give up the implication is you give up the principal balance so you just now have that income stream for the rest of your life that number is going to be substantially less than what you would need if you're just taking money from an investor my portfolio each year as a percentage basis okay let's assume we're going to go that route and we're going to create a sustainable distribution from our Investment Portfolio the framework we can use for this is the four percent rule which is a strategy it's not really a rule it says if you limit your distributions to four percent of the Investment Portfolio the principal you have a higher probability of not outliving your money you're making your money last over an extended you know 30-year retirement period now of course how you invest your money is important here as well but that's a topic for another discussion so Investment Portfolio times four percent tells you how much income you can take from said Investment Portfolio if you reverse that you can figure out how much that income stream is worth in portfolio folio dollars okay stay with me here so it's easier if we look at it from example if we think your first pension is going to be worth fifty thousand dollars when you retire what is that worth in portfolio dollars so by reversing the four percent rule we take fifty thousand dollars times 25 it gives us 1.25 million that's what your first pension would be worth using this strategy this framework okay so it's easy to see how a pension could be worth 750 a million a million and a half depending on how long you work how high that pension gets this framework can also be useful as we're working on putting together the rest of the retirement income puzzle what other source of retirement income will you have available now within Furs retirement is always about the big three so the first basic annuity Social Security and the Thrift Savings Plan now Social Security is a benefit available to most U.S workers it's not unique to first but they do include it as part of the calculations here depending on your savings and investing habits you may have other assets on the balance sheet that can help you know work to provide retirement income IRAs Roth IRAs taxable investment accounts real estate Investments and other sorts of assets on the balance sheet okay so we just need to consider those now let's look at Social Security first because I think Social Security is interesting it was never intended to be the primary source of income but it is a complimentary piece and I think it's going to be important for most employees no matter what people say about the program how is account calculated of course we know the program is funded by payroll tax employees pay 6.2 percent of their wages up to the max of 160 200 for this year 2023 and employers match that payment so that's how the program is funded Social Security tells us from ssa.gov that the max benefit for this year you're retiring at age 62 is 2572 dollars and at full retirement age if you go out of 67 that maximum benefit would be 3627 okay so without getting too far on the weeds here let's brainstorm all right let's just assume you're making that maximum amount 160 200 you retire and now you qualify for that maximum benefit okay so 25.72 coming in a month that means you'll be replacing thirty thousand eight sixty four each year or 19.2 percent of your pre-retirement income of a hundred and sixty thousand if you're waiting if you're claiming at 67 you're full retirement age and you still have the same parameters here the same income you would replace forty three thousand five hundred twenty four dollars so that thirty six twenty seven a month turns into 43 Grand and change or 27 of that same pre-retirement income all right so pretty big Delta there now there are a lot of variables around Social Security and this is only intended to be a very high level look at how the program can play into you know structuring your retirement income plan generally speaking individuals with lower wages may replace more of their pre-retirement income on a percentage basis than those with higher wages okay it's just how the math works out and of course if you're waiting until 67 if you get out to age 70 your benefits are going to continue to accrue based on delayed retirement credits of course I encourage you to check your estimates go to ssa.gov see what your specific work record is looking like what your benefits are estimated to be because this stuff varies widely of course but if if we're just using the framework I describe we can kind of ballpark things at 20 to 25 percent of pre-retirement income for the sake of this conversation but again that's going to vary based on your record and on to the tsp account okay I'm making significant contributions receiving employer match investing well are all part of The Upfront work to create potentially create a healthy tsp balance however the hard work doesn't stop there we could argue that it's actually more difficult to make your money last within retirement than it is to grow in the first place more risk involved from you know longevity risk returns Etc but we can apply the same framework we were talking about when we equated a value to your first pension the four percent rule so if you're curious how much income you could generate from your tsp take your projected portfolio balance times the four percent number and that can give you what you might have to complement Social Security and your TSB and you know if you're running the numbers and you know how much income you need from this Source you can reverse it again so if you you know you need forty thousand dollars to make up the difference with Social Security and your first pension on providing you take that forty thousand dollars times the number 25 and it gives you your portfolio value so you need a million dollars in your tsp to make up the difference there according to the four percent rule strategy if that's the route you want to go it's a nice framework like we said ballpark stuff here of course now there are also planning strategies around the tsp that we can use to potentially optimize maximize what you're doing there from an investment standpoint as well as from a tax standpoint and when you get to trying to create the sustainable income strategy your investment mix is going to be very important okay so last question I have for you is are you contributing enough to your Thrift account to make up the difference what you need this thing to produce on an income basis so run the numbers and see where you're at all right we're going to wrap up the last part of this with other assets so you have other assets on the balance sheet the same rules are really going to apply that apply to the tsp do you have a Roth IRA traditional IRA other retirement accounts taxable investment accounts you can apply the four percent rule there to see how much income those sort of assets might generate real estate properties are going to have unique characteristics tax diversification strategies can also play here that's just using different account types they carry different tax treatments to try to optimize maximize your money from a tax standpoint down the road the buckets to consider pre-tax after tax and taxable investment accounts okay last step sum it all up right so take take your personal income worksheet out write down all the source of income and see where you stand let's move on how much income will you need in retirement now this question people get frustrated with financial planners always asking this question because it's abstract it's it's out there it feels like guesswork and I get it it's emotional there's a lot of unknowns but it's important to take a stab at it right to kind of see what we might need ask yourself some of the following questions how long do you plan to work how long do you think your retirement might last what are some of those retirement goals put yourself in the day-to-day try to create a vision of what that looks like what are those goals what's the spending going to look like some other things you might want to think about do you plan to pay off your mortgage do you plan to have charitable contributions are you going to support your kids those sort of bigger questions on how you might spend money so if you're looking at your current situation and you save 20 of your income and you spend the other 80 goes out with taxes and all your other expenses that's probably pretty close to what you're going to need within retirement so most retirement planners ballpark at between 80 to 100 of your current annual spending so take a look at where you're spending break it down into detailed categories and that can give you a pretty good idea of what you may need in retirement now some things are going to fall off like some extent expenses change but you're going to pick new ones up so let's just look at an example let's say you make 150 Grand a year you save 20 of that that means you're spending a hundred and twenty thousand dollars a year so that means in retirement you're going to need to replace anywhere from ninety six thousand dollars which would be 80 of 120 or the full amount not the 420 000 in order to meet your your goals from retirement income standpoint some expenses that may drop off taxes child care commuting your savings and investing contributions obviously and then some expenses that make may increase travel entertainment Healthcare Fitness and Wellness gifting professional help we tend to have more people in the house helping us within retirement so spend some time with it um you know expenses do vary quite a bit by person so the question I have for you is what is your current spending and how is that likely to change over time all right let's take a moment to regroup I've thrown a tremendous amount of information at you in an article in a video that was intended to just discuss the first pension all right so here are some things to consider many families we work with are able to replace around 50 of their income their pre-retirement income from their first basic annuity and Social Security benefits now of course this stuff is incredibly subjective so keep that in mind so that means it's up to the remaining assets that you have on the balance sheet your tsp IRAs other retirement accounts taxable investment accounts real estate Investments Etc to replace the other 30 to 50 percent depending on how much you need so you need to spend some time with that and see how much you think you might need is it going to be enough what's coming in based on your personal income retirement sheet the first pension may replace some around 25 percent of a career federal employees pre-retirement I3 that's kind of a ballpark number there to consider we said Social Security anywhere in that 20 to 25 percent range complementing that okay it depends each work record is significantly different so I really think that the first pensions rule is to work as a complimentary source with Social Security to provide that core of your income and really take off it's a tremendous benefit to have fifty percent of your pre-retirement income accounted for from two benefits and then make up the difference with your investment accounts okay so that's a big Advantage these defined benefit plans can provide and one of the other big benefits I mean this really reduces a lot of the stresses longevity risk sequence of returns volatility that's inherent in the markets so when you have these guaranteed retirement income sources from the federal government that takes a lot of the stress off the plate but there is work to do so I would encourage you do the math see where you stand make sure you're on track are you contributing enough to your other accounts to get where you want to be within retirement I hope you found this useful hope you can take it and use it within your plan if you'd like to discuss what you have going on I would be happy to talk with you so please reach out send me a message and we can go from there again I'm Justin with District financial advisors and I hope you'll give my channel a like and happy planning to you

Channel: Justin Holtz, Financial Advisor

Views: 15,656

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Id: n0gfe6N2xRk

Length: 14min 16sec (856 seconds)

Published: Fri Sep 22 2023