Saving for retirement through the Thrift Saving Plan or other savings instruments such as IRAs should be high on everyone’s list. Retirement is one of the three major goals that individuals save for, along with the purchase of a principal residence and children’s’ education. In fact, retirement is the only one of the “big three” goals that a bank will not give you a loan for.
In previous articles we’ve looked at the “80% rule” which posits that one who retires on 80% of their pre-retirement income will enjoy a retirement lifestyle quite similar to their pre-retirement lifestyle. Unless a person in covered by the Civil Service Retirement System (CSRS) and works for 41 years and 11 months, they will not have 80% of their pre-retirement income without doing some serious retirement savings on their own. Your average CSRS or FERS retiree who leaves federal service after working for 30 years is going to replace about 60% of their pre-retirement income from their CSRS or FERS pension and Social Security. So 20% of their retirement income will have to come from the TSP or other savings.
Individuals who are striving for the 80% goal will be doing some serious retirement savings; generally through tax advantaged plans (e.g., TSP, IRA, etc.). One problem with most tax advantaged plans is that, if money is withdrawn prior to a certain age (most often 59 ½ for IRAs and 55 for company retirement plans) penalties are assessed. In order to reap the plan’s tax advantage, one has to give up easy access to the money.
I bet that some diligent retirement savers were in a bad place as they missed two full paychecks during the recent 35-day government shutdown. Yes, they knew that they would get paid in the future, but many creditors didn’t care – they wanted their payments on schedule. These savers found themselves in a tight spot because they were saving all their money for their retirement and not setting any aside in an emergency fund.
Emergency funds should be easily accessible, so that, when the need arises the money is there to satisfy it. Some on-line banks offer savings account rates of over 2%. In 2018, only one of the TSP funds (G) returned over 2%. A check at bankrate.com on February 1, 2019 turned up three FDIC insured banks that offered a rate of 2.4% with no minimum balance requirement. Money from these accounts can be accessed quickly and, if there is no need for the money, it sits there and grows at a rate not that far from what one would earn in the G Fund.
Financial writers suggest that emergency funds cover 3 months to a year’s worth of expenses. Three months should probably be adequate for federal employees, as our jobs are more secure than the jobs of most private sector employees. A federal employee who had a 3 month emergency fund stashed away would have easily weathered the shutdown. You would not have seen their pictures in the news stories about federal employees who went to food pantries, or who started “go fund me” pages.
If you don’t already have an emergency fund – start one. Start one even if it means contributing less in the short term to your Thrift Savings Plan account. Just don’t miss out on Uncle Sam’s generous matching contributions – make sure you contribute 5%.