Have you ever read an article in the financial media in which you were told that you need to save ten times your salary by the time you retire? Have you then looked at your Thrift Savings Plan balance and shaken your head? If so, you’re not alone.
Don’t panic; those financial articles were not written for you. The audience they are written for is the vast majority of those in the workforce who do not have pensions provided by their employer. As a federal employee, you have a “defined benefit pension” (aka FERS) to rely on. The articles in the financial press assume that you will receive Social Security and will have to make up the difference by setting money aside in a “defined contribution plan” (like the TSP).
If I had only my Social Security, I might really need the 10x of my salary that Fidelity Investments and the Investor’s Business Daily suggest; or the 8x of my salary that Investopedia says I must have. But I have FERS, and if I work for 30 years under FERS I will have a pension (called an “annuity” by the Office of Personnel Management) that is roughly 30% of my high-three salary.
Assuming that my salary at retirement is $100,000, how much would I have needed to set aside to be able to draw $30,000 a year (30%) for the rest of my life? $750,000, according to the generally accepted “4% Rule”. This rule (maligned by some advisors) posits that you can withdraw from a sum of money (e.g., your TSP or an IRA) at a 4% rate each year; adjust your annual withdrawal each year for inflation; and have a better than 90% chance of “dying with money in the pot”. In a way, my FERS pension is the equivalent of having socked away enough money to end up with three-quarters of a million dollars over the course of my career. And my FERS pension only cost me 0.8% of my salary while working (if I were a regular FERS employee hired prior to January 1, 2013). This tells me that I do not need 10 times my salary in order to have a comfortable retirement. I will want more than what the combination of FERS and Social Security gives me, but it will be a lower amount (say 5 times my salary) that is easier to achieve if I save in the TSP throughout my career.
Now, the fact that we have a defined benefit plan like FERS should not discourage us from saving extra money for our retirement, but it should make us feel better about our financial future. I firmly believe that those of us who are current federal employees will have FERS for the rest of our lives. Congress won’t take it away from us because, if they did, they would be taking it away from themselves; and when’s the last time you saw a politician picking his or her own pocket?