Those of us under the FERS retirement system have three major sources of retirement income that derive from our work as a federal employee. Those sources are our FERS annuity, Social Security and the Thrift Savings Plan. All three are important, but the TSP requires more attention than either FERS or Social Security.
This is because the TSP is voluntary and the other two are mandatory. You have to contribute to FERS (0.8% of salary for those hired before 1/1/2013 and a higher amount for those hired that day and later) and to Social Security (6.2% of salary until you reach the “tax cap”, which was $127,200 in 2017 and, at the time this article was prepared, appears to be $18,500 in 2018). You don’t have to contribute a darn thing to the TSP.
However, if you don’t contribute, or don’t contribute enough, you will not have the level of retirement income that you want. Financial planners say that if you retire with 80% of your pre-retirement income, you will have roughly the same standard of living that you had before retirement. They base this figure on the fact that, after retirement, you will have lower expenses, no payroll taxes and (hopefully) no mortgage to pay down. Let’s look at an example of how important the TSP is to achieving this 80% goal.
We have a FERS employee who is making $100,000 when he retires after 33 years of federal service at the age of 62. He will receive 33% of his high-three as the FERS annuity. He will have a “replacement rate” of around 25% from Social Security, resulting in 58% of pre-retirement income. This leaves him 22% ($22,000) short of reaching that 80% pre-retirement income goal.
If this individual follows a 4% annual TSP withdraw strategy, he would need a TSP balance of $550,000 to make up the $22,000 difference. And if he took a passive approach for most of his career to funding that TSP balance it’s unlikely to reach that size. That’s why it’s critical for employees earlier in their careers to understand the importance of the TSP and fund it sufficiently to become an “80 percenter.”