Can You Ever Afford Retirement?

Most people become anxious when they close in on their retirement date. However, there is no need to worry about how life will be without a steady paycheck. This is because a generous pension awaits you after your retirement. It gets better if you are under the old CSRS compared to the FERS.

In this article, we’ll focus on the numbers that you need to familiarize yourself with before you retire. These include rules and suggestions that are meant to govern our financial decisions in the future.

The Rule of 72

This rule is used to illustrate the time value of money. If someone starts saving early, they will have more money invested at retirement compared to someone who starts saving later; considering all factors are kept constant.

Take an interest rate and use it to divide the number 72. The result that you get represents the number of years that it’s going to take for the amount to double. For example, if you invest money at a 6% interest, it’s going to take 12yrs for you to have doubled the initial amount.

This rule is affected by inflation. If the rate of inflation runs at 3%, this means that in 24yrs the value of the dollar would be cut in half.

The 80% Rule

This rule suggests that by retirement, you should strive for a retirement income that is 80% of your preretirement income. This way you will be sure to have the same standard of living that you had before you retired.

The 80% rule makes an assumption that your expenses would be much less in retirement since you would have paid off your mortgage and you won’t be paying payroll taxes anymore.

The 10% Solution

This rule suggests that when you make a contribution equal to 10% of your salary, the total amount saved should be enough to sustain you after retirement.

The 4% Rule

This rule is used to determine the amount of money that one should withdraw from their retirement account every year. The 4% rule will ensure that the retiree has a steady stream of funds and still maintains a balance that will sustain them for a number of years.

This rule was developed in 1994 and shows that with an annual increase in inflation, the 4% rate is the highest withdrawal rate what was held up over a period of 3 decades.

The 100 Minus Your Age Rule

The percentage of stocks in your investment should be 100 minus your current age. When you follow this rule, you will reduce your exposure to stocks as you get older. For example, if you are 55 years of age, you should have 45% of your investment in stocks.

This rule allows you to have a higher percentage of stock in your TSP compared to if you were in the L funds. The L Income Fund is designed for members who need their money now- it’s a 20% stocks and 80% fixed income.

Conclusion

Regardless of the fact that federal employees have enviable job security, it’s advisable that they set aside some finds in an easily accessible emergency fund in preparation for retirement. An adequate amount should be an estimate of your expenses for 3 to 12 months. However, there are rules that govern reorganizations and RIFs so an advance notice should be issued in the event of changes that could potentially affect your retirement.