Saving Money at 80 Percent of Your Income Before Retirement

There are three major things in life one usually saves for: their home, their education or the education of their children, and their retirement. And whether you’re using an IRA or the Thrift Savings Plan, your financial future should be a primary focus, especially considering that of the three things listed, retirement is the only one that you can’t take a loan out for at the bank.

There is something called the “80 percent rule” which basically states that a retiree can generally continue living at their same pre-retirement levels if they retire on 80 percent of their pre-retirement income. The problem is hitting that 80 percent mark. Unless you happened to have worked for 41 years and 11 months and are able to get covered by the CSRS (Civil Service Retirement System), it is going to take some tricky financial shuffling to reach that 80 percent mark.

For instance, Social Security and pension will only cover about 60 percent of the pre-retirement income for a person who enrolled in the FERS or CSRS for 30 years. That means the additional 20 percent will have to be made up by the TSP or some other retirement savings account.

The problem with tax-advantage plans like an IRA or TSP is the penalties that can occur if certain stipulations are not followed. If you take your money out before a predetermined age of 59 and a half, for IRAs and 55 for other retirement plans through your company, you will be fined. To get the maximum benefit from these plans, you can’t touch your money until it’s time. Even if you need to borrow against it to pay creditors and other bills (like for instance during the recent 35-day government shutdown) then you will be harming yourself for the future. That is why, in addition to a retirement fund, an emergency fund – or someplace to have easy access to money – should be saved towards as well. With many saving’s accounts accruing interest at 2 percent, this is not that far off from the TSP fund. If it remains unused, it will be there, earning money, just like it would’ve in your retirement account.

Three months to a year’s worth of bills and payments is what financial planners suggest you keep in this emergency fund. That would’ve easily covered the government shutdown and more. Even if you’re unable to put as much away in the TSP as you would, it is still important to start an emergency fund as soon as possible. Just make sure that you’re still hitting that 5 percent mark with your TSP funds to get the matching contributions from the government.