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What if, at retirement, you find out that your retirement income will not be enough to let you continue to have the standard of living that you enjoyed before retirement? Many financial planners suggest that you shoot for 80% of your pre-retirement income after you have retired. This 80% number comes primarily from the fact that, in retirement, you will not be paying payroll taxes (e.g., Social Security, Medicare, etc.), you will no longer be saving for retirement (e.g., TSP, IRA, etc.), and your expenses are likely to decrease (at least some).

Among the reasons one might find themselves coming up short are starting to save later in their career; spending to put their children through college; or not budgeting and ending up spending more than what was prudent on a regular basis. Often people early in their career don’t begin thinking of retirement until they reach their 40s, giving them less time to save and giving their savings less time to compound.

There are several things you can do to attempt to remedy the shortfall, and this article will look at two of them: 1) working longer; and 2) planning on living on less. Neither of these sounds like fun, but if either one of them lets you enjoy your retirement for a relatively long time, it’ll be worth it.

Among the characteristics of one who might lean towards working longer are that they love (or at least like) what they do, and they have a relatively long life expectancy. Conversely, a person who will consider living on less would hate (or at least dislike) their job and may be unsure as to how long they are going to live.

A January 2018 paper titled The Power of Working Longer, published by the National Bureau for Economic Research, compares how working longer compares with saving for retirement through contributing more to a defined contribution plan. The results are stunning. Working for 3 to 6 months more is equal to having set aside an additional 1% of salary in a defined contribution plan for a period of 30 years. The paper states that if a person waited until ten years from retirement to up their savings, only one months of extra work would equal the extra 1% they set aside because of the smaller period of time for growth of the contributions.

What was the primary cause for the strength of working longer? The increase in Social Security benefits, that’s what. I suspect that most readers of FEDweek’s TSP Investment Report were born in 1960 or later and have a Social Security Full Retirement Age (FRA) of 67. For each year a person applies for Social Security prior to their FRA, the reduction is 6.67% (for the first three years prior to their FRA) or 5% (for any years in excess of three). These reductions are applied monthly (5/9 of 1%, or 5/12 of 1%). So, if one applied for Social Security at 62, their benefit would be 30% less than it would have been had they waited until their FRA. In addition, working beyond one’s FRA results in an annual increase of 8% up until the age of 70. One applying for Social Security at 70 will receive 24% more than one retiring at their FRA. In addition, in many cases working longer will increase the wage base used to determine the Social Security benefit.

Ideally, you’ll have saved enough so that your FERS annuity, Social Security, and TSP will allow you to replace 80% of your pre-retirement income. If you haven’t, you’ll still have an opportunity to reach your desired replacement level if you’re willing to work just a little bit longer.

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