While retirement often is viewed as a certain point in time—the application is effective as of a certain date, you get the cake and hand in the ID badge to Security—there actually are three important points, according to a document produced for the Labor Department.
While the report, titled Taking the Mystery Out of Retirement Planning, is not specific to federal employees, its message is equally applicable regardless of where one works, and it doesn’t take much to project the special considerations of federal employment into its advice.
The first key point, it says, is about 10 years out from retirement. At that point it’s important to get a good understanding of what you have. That means assessing the value of assets including cash, investments, the cash value of whole-life type life insurance, and anything else that could be turned into cash, even a home or jewelry. The figure for the home should be the equity amount—that is, the market value of the home minus any amount still owed as a mortgage or home equity loan. Set aside any emergency funds, as well as funds designated purpose, such as paying for a child or grandchild’s college education.
Then project the value of those assets up to your retirement point, bearing in mind that the rate of return on each will vary. For example, if you own long-term bonds, the yield on them is predetermined. Cash or cash equivalents such as money market funds likely will grow only a little due to investment returns. Your projected returns on stocks and other investments with higher potential for change both up and down are a personal decision. However, just going through this exercise will help illustrate whether you are properly diversified among types of investments, as well as within a type of investment.
When projecting growth, don’t forget to include projected new savings up to the point of your retirement.
The second key point is at retirement. Assess both your current expenses and your projected expenses as of that date—or roughly, if you don’t have a specific point in mind yet. Then add in projected income – for federal employees, including that from annuities such as CSRS or FERS civil service benefits – Social Security and any other fixed sources of income.
Many experts now recommend having 80 to 90 percent of pre-retirement income, it says. If the math suggests you will come up short, options include increasing investments in retirement savings plans, delaying retirement, cutting expenses and examining whether you could be more aggressive in your investing.
The third key point is the duration of retirement. The average American male has a life expectancy of 17 more years at age 65, the average female 20 years, it says, and those are only averages—it’s financially prudent to prepare for a retirement of 30 years.
Looking at that time frame will help decide among withdrawal options from retirement savings—for example, converting a TSP account into an annuity versus taking it out in a lump sum.