Aiming for an ‘Adequate’ Retirement

Certainly the majority of federal employees would not describe federal retirement benefits as lavish. A larger number, but still not a majority, would term those benefits comfortable.

How about “adequate”? Now we’re getting closer.

In the most recent survey specifically asking to what extent benefit programs meet employee needs, all but about 6 percent of employees under FERS and all but about 8 percent under CSRS said their defined benefit programs will meet their needs to a moderate or great extent. The TSP program received about the same assessment.

But what is “adequate” to you, and how do you know when you will achieve it? A recent report from the Congressional Budget Office raises important points to consider.

Replacing a certain percentage of pre-retirement income—commonly in the 70-80 percent range—is a standard way of projecting adequacy of retirement income, and thus when it is “safe” to retire. For federal employees, that often involves hitting a target number of years of service (and being old enough to be eligible with that many years).

For someone retiring with 30 years of service, for example, the CSRS benefit is 56.25 percent of high-3 salary; at 35 years, 66.25 percent, and at 41 years, 78.25 percent. The FERS basic benefit is lower, but that system also pays Social Security benefits and offers employer contributions into the TSP which together were designed to make a benefit about equal to that of CSRS.

But the CBO warned that projecting whether retirement income will be adequate involves many moving parts and considerations that may be easily overlooked by focusing just on a formula.

It said that there are other ways of looking at retirement income adequacy, such as assessing the risk of outliving one’s assets such as the TSP, other investments, and other sources of income other than retirement benefits.

Further, there are different figures to use as pre-retirement income—just the last year of employment, for example, or a period of years, especially if income varied significantly in the years before retirement.

Also, remember that TSP investment results can play a large role in eventual retirement income, especially for FERS employees.

Apart from all that, a percentage figure “applies to few people because target replacement rates can vary greatly depend­ing on individual circumstances,” the CBO said.

Factors that could influence a needed replacement rate, it said, include: what tax rates will be experienced in retirement; whether the individual continues or ends ongoing savings; whether lower housing expenses will decrease, for example if a mortgage has been paid off; what will be the level of savings on work-related expenses; potential differences in health-related spending; and the prospect of needing long-term care.

It added: “The effect of other factors, such as having children leave home, is less clear and subject to ongoing research.”

Taken together, that amounts to a warning against making retirement decisions based on when you will meet some target number of years of service, and thus some target percentage of pre-retirement income.

If you’re too focused on that, you’re doing a less than adequate job of planning for your retirement.