Use Caution When Estimating Your Expected Income

A lot has happened since 1987 when we first learned of the Thrift Savings Plan and how it fits into the multi-tiered Federal Employee Retirement System (FERS).

For today’s retiring federal employees, the income that comes from Social Security, FERS, and investments in the Thrift Savings Plan (TSP) will completely replace the net income they earned while in the workforce.

This may sound ideal, but it is important to remember that there is a rather large divide between your gross salary and the net income you may spend every two weeks. Likewise, you will also find that there is a noticeable difference between gross retirement income and the net. The three modules of your retirement are subject to an assortment of withholdings, and your FERS benefit could be subject to various reductions. For example:

• The basic FERS retirement benefit, also known as a pension or annuity, can be subject to reductions for things such as part-time work schedules, survivor benefit elections, and age penalties (in some instances if the employee retires early). It is also possible if you have a former spouse you could be required to provide a portion and/or survivor benefits to them.
• For federal income tax, there are also FERS withholdings and potentially, depending on the state, state income tax, and insurance premiums.
• While most states exempt SSA benefits from taxation (there are exceptions), there could be withholdings from your Social Security Benefit for federal income tax (potentially state income tax as well).
• If you take part in Medicare Part B, the premium will usually be suspended from your Social Security retirement benefit.
• The TSP payments that you accept after leaving the workforce can be subject to federal income tax withholding and state tax.
• While you may have to do a little research to figure out the tax withholding from your various sources of retirement income, you should be able to calculate your net retirement income. It is important to do this so that you are confident that you can have a suitable income to meet your necessities as well as any potential unexpected future expenses.
• It may also be necessary for you to create the same net income as you earn in your biweekly salary. Are there expenses that will lower once you retire? Maybe, and maybe not.

You may be able to pay off your mortgage, but it is likely that your home will still require a certain amount of maintenance. There will be property taxes, possibly homeowners association dues and fees that will all need to be paid.

• If you have children, you may put the youngest child through college, but are you going to want to help with wedding expenses, graduate school or family vacations? Will you want to be able to treat your future grandchildren to toys and trips and other things grandparents spoil their grandchildren with?
• You may no longer need to pay for commuting and clothing appropriate for the office, but there will be countless other ways to spend your retirement income.

Common sense is key when making a solid financial plan. You will want to be prepared for unforeseen healthcare costs as well as the possibility of long-term care. Any decent financial plan usually starts with some common sense.

Get A Jump on Estimating Your Retirement Income

Calculating your potential income from the old Civil Service Retirement System or FERS can be simple. Many people find it helpful to ask a retirement specialist in their HR department to arrange an estimate for their date of possible future retirement.
To get a solid estimate of the income you could receive from Social Security, you can go to www.ssa.gov to request a personal benefits statement. Currently, the Social Security Administration mails Social Security statements to workers age sixty and over who are not presently receiving Social Security benefits yet and do not have a “my Social Security” account. The Statements will be mailed 3 months before to your birthday.

It is slightly more complicated to estimate the amount of income you will receive from your investments in the Thrift Service Plan. There are generally three ways to generate income from your TSP investment. First, you must determine how much monthly income is required to supplement your FERS and Social Security benefits, and on a monthly basis withdraw a specific dollar amount. Be sure to remember to allow for taxes. The risk here being that it is possible to withdraw too much too soon and run out of money.
One good rule of thumb is to not withdraw more than 3-4% of your account balance in a single year. The second option, to decrease this risk, is to withdraw payments monthly, based on your life expectancy. The payments are smaller, the younger you are. As you age and your life expectancy decreases, the payments still increase. Whichever option you choose for withdrawal, your balance in the TSP will still be invested, and you may choose inter-fund transfers while receiving payments.

The third method to receive income from your TSP account is to purchase a life annuity to provide an income stream that will carry on over the span of your life. The annuity option has a range of features that offer payment increases to balance inflation, a cash refund or a ten-year certain feature to allow the balance of your original investment to be paid to your beneficiary if you do not live the length of time it would take to recover the original investment.

Two disadvantages to the annuity option are:

1. The potential loss of control of your investment

2. You will not be able to receive partial withdrawals or make changes to your investment options after the annuity has been purchased.

Annuities that are purchased today will be computed based on a 3% annuity interest rate index that will be fixed for the life of the annuity. Which means that if interest rates increase over time, you are out of luck. The positive to this is feeling secure in the fact that your money will not run out over the span of your life. If you choose increasing payments, the payout will be adjusted annually up to three percent to offset future inflation.

Of course, you do not have to settle for a single withdrawal option. It is possible to choose a combination of monthly payments and annuity. Visit the retirement income calculator to learn more about these options and to estimate the payments,

It is also possible for you to transfer your TSP investment (either partial or in entirety) to an individual retirement account (IRA) so that you can make different kinds of investments, or purchase other annuity products. It is essential to use caution before moving your savings out of the TSP. It is practical to do financial planning either on your own or with the help of a reputable financial adviser. Before making any decisions in regards to moving your money, it is recommended to reach out to a financial advisor for assistance.