There’s one magic date where, if you know it, your financial and retirement planning tasks will be a snap. That date is the date on which you are going to die; so, in addition to being magic, it is also unknowable.
Some pundits have said that the ideal financial plan has you taking your last breath at the time you are spending your last dollar. Unless we plan to leave money for our children as an inheritance, that is what we strive for. We’ve saved in the TSP and IRAs for most, if not all, of our work life with the goal of spending that money during our retirement but we don’t know how long our retirement will last.
You can estimate your longevity by looking at your family history, assuming that you will live as long as your ancestors have and making plans to spend your money over that period of time. You would want to figure in the “spenders’ slope”, which posits that, in your later years of retirement, you will spend less money than you did in your early years of retirement. But estimates aren’t always accurate. Based on how long my ancestors have lived, I figure that I have until my early 90s to work my way through my TSP and IRAs. Imagine my concern when, back in March, they were wheeling me into the OR for open heart surgery! Because you are reading this article, it’s clear that I survived and my plan for depleting my assets remains the same as it was before March. But, had that not been the case, I would have died with money in the pot, and with my spending plan unfulfilled.
Unfortunately, without a crystal ball you can’t plan any better than I did. You estimate your life expectancy and plan your spending to fit your estimate. You must accept the possibility that: 1) you might die before exhausting your savings; or 2) you might run out of money before you run out of time.
Fortunately, as federal employees and retirees, we have an advantage that many others don’t have. We have our FERS annuity (or pension, as some call it). Though FERS has no cash value as do plans like the TSP, its true value is in the income it provides us. We will never outlive the stream of income that FERS generates. As long as we can fog a mirror those monthly payments will show up in our bank account on or about the first of each month. Plus, they are indexed for inflation; in 2020, the FERS COLA was 1.3% and it looks like it’ll be 2% or more in 2021. Spoiler Alert – not all retirees receive the COLA; with exceptions for certain special categories of employee, the COLA is only payable to those FERS retirees who are 62 or older. We’re lucky here, as a large majority of private sector employees do not have access to an annuity/pension like we do.
Another lifetime source of income is Social Security. No one refers to Social Security as an annuity or a pension, but it fulfills the same purpose. If you are covered by Social Security (as are 94% of US workers) and have amassed 40 credits (generally the equivalent of having worked in Social Security covered employment for 10 years), then you will be entitled to receive a Social Security retirement benefit for the rest of your life. Plus, Social Security benefits also have a cost of living adjustment. For 2020 the adjustment was 1.3% and for 2021 it looks like it might be as much as 3%.
So, as we age, we should thank our lucky stars that we are entitled to FERS and Social Security, and we should plan as best we can to deplete our TSP and IRAs without running out of money.