As federal employees, we are blessed with an excellent retirement system. Not only do we have the Thrift Savings Plan, we also are entitled to Social Security and a defined benefit pension (FERS). There are still a few employees left in the older Civil Service Retirement System (CSRS), but the last CSRS employee was hired over thirty three years ago. That’s why I’m directing this article at FERS employees; particularly, at FERS employees who still have a bit of time remaining before they choose to retire.
We are going to look at whether our retirement income will be enough for us in retirement. We will define “enough” using a simple rule of thumb that many financial professionals suggest we use. That rule of thumb is that we should strive for 80% of our pre-retirement income in retirement. This so called “80% Rule” posits that if we retire on 80% of our pre-retirement income, we will have a standard of living that is just about the same as our pre-retirement standard of living. This is based on three assumptions.
Assumption 1 is that we will no longer be saving for retirement. We will not be contributing anywhere from 0.8% to 4.4% of our salary for our FERS pension. We will not be paying a 6.2% payroll tax for Social Security (up to the tax cap – $127,200 in 2017). We will not be paying a 1.45% payroll tax for Medicare. We will not be contributing to the Thrift Savings Plan (the 2017 elective deferral amount is $18,000, with an additional “catch-up” contribution of $6,000 allowed beginning with the year in which you turn 50). You will, however, be paying up to 10% of your FERS pension if you elect a survivor benefit for your spouse.
Assumption 2 is that our expenses will decrease. This is likely to be true for most retirees; at least after their first few years of retirement. Some expenses that will go down are commuting, clothing and food outside the home. You also may have finished with the expenses of raising and educating your children.
Assumption 3 is that you will no longer have a mortgage. Only you know if this is going to be true.
As with any general “rule”, the 80% rule will not apply to everyone. Some of you might require less than 80% if you’re retiring to a less expensive home in a lower cost of living area and are planning a simple, but relaxing, retirement lifestyle. Others might want more than 80% in the early years of retirement, as they travel or otherwise complete the items on their bucket list.
An upcoming article well look at whether it is reasonable to expect 80% of our pre-retirement income from our three sources of retirement income and what steps we need to take while still working to get to that 80% level.