There are some commonly accepted rules for retirement that most retirees tend to follow. Yet, there are others who would choose to call these “rules” “myths” and it’s worth revisiting just what those are.
One rule is that you should replace 70% to 80% of your pre-retirement income once you retire. There’s a solid basis for this rule. If you want to keep the same standard of living that you had prior to retirement, 70% to 80% of your pre-retirement income should do it. Consider that you will not have mandatory withholding of 8.45% to 8.95% of your salary for your federal annuity, Medicare, and Social Security. Add to that the fact that you will no longer be contributing to the TSP (up to $20,500 or $27,000 per year depending on your age), and you will find that your expenses will significantly drop.
But not all retirees are content to spend 70% to 80% of their pre-retirement income. Many pre-retirees are looking to check off many (if not all) of the items on their personal bucket lists. If you’re going to travel extensively while you’re still young enough to be able to enjoy it, you may need 100% or more of your pre-retirement income for a while. At the other end of the spectrum, once you are among the group that gerontologists call the “frail elderly” (85 or older), you may need far less than that 70% to 80%.
You need to figure it out for yourself and spend as is appropriate to your situation. 80% is a great guideline when you are looking off into the distant future for your retirement, but you may need to adjust your spending based upon your need once you get closer to your retirement date.
Speaking of spending and needs – another rule/myth is that one should withdraw from their portfolios at a 4% rate and adjust that rate for inflation each year. Studies have shown that, with a 4%, inflation adjusted withdrawal rate, your odds of running out of money by the end of 30 years is less than 10%. In fact, in half the scenarios from the studies, the individual had as much (or more) than they started with when they reached the 30 year mark if they held to the 4% withdrawal rate. This is another area where you should look at your own wants, needs, and financial resources before you decide on a withdrawal rate. And nowhere is it written that you must start with one withdrawal rate and stick to it.
We, however, are federal employees or retirees. The 4% rate is less important to us than it is to others who are not as fortunate as we are. In addition to Social Security, we have an annuity (pension) that will keep on paying us for as long as we live and will adjust our payments annually based on inflation. Therefore, our TSP withdrawal strategy is less important than it would be for Joe Sixpack who only has Social Security and a 401(k) (if he’s lucky).
Consider these and other common “rules” as you plan your retirement, but do not treat them as gospel. Make your own retirement plan.
I’m guilty of promoting these “rules’ during the retirement seminars that my company, Federal Career Experts, puts on for federal agencies. But both I and my other instructors will emphasize that rules are only good as long as they apply to an individual. Look at these rules as guides but adapt them as you need to.