Putting It Off

Across government and throughout the private sector, people are reconsidering their plans to retire because of the tough economy and an uncertain future. How much will you really gain by postponing your plans to retire? How much difference will it make if you quit and start a second career?

The answers to those questions revolve around an even more basic question: Will you have enough income to cover your expenses? This week, we'll look at how you should think about that question if you're under the Civil Service Retirement System. Next week, we'll tackle the issue for those under the Federal Employees Retirement System.

To understand the factors in play here, let's look at a case study of a hypothetical federal employee.

Getting Rich? Let's assume Rich is eligible to retire this year with 30 years of service and a year of unused sick leave. His current salary is $113,007 and his high-three average is $108,027. His retirement will be computed as follows:

Now suppose Rich plans to choose the maximum survivor benefits for his wife. That will reduce his retirement benefit by $6,022 per year -- an almost 10 percent reduction. He also will pay income taxes on his reduced retirement with a small credit for his previously taxed retirement contributions. His net retirement income will be about $43,000 a year.

That's less than 40 percent of Rich's current salary, but we can make another assumption to show this isn't as bad as it sounds. Suppose Rich puts a fair amount of money away in his Thrift Savings Plan account. That, plus other deductions, could leave him with only slightly more than half his annual salary in his current net income. Hypothetically, his deductions would look like this:

• Retirement (7 percent): $7,910
• Medicare tax (1.45 percent): $1,638
• TSP contributions: $22,000
• Income tax: $21,851
• Total salary deductions: $53,400
• Net income: $113,007 - $53,400 = $59,607

Considering all the deductions from Rich's salary, his retirement is only a little more than $16,000 per year less than his current net income.

(Note: I didn't include deductions for insurance -- health, life, long-term care, etc. -- in the example, since these costs will remain mostly the same in retirement. The only difference is pre-tax deductions for these benefits are not available to retirees. But to balance out this loss, many employees reevaluate their life insurance needs after retirement and find they need less coverage.)

Closing the Gap

Suppose Rich still isn't happy with the difference between his net salary and his retirement income. What can he do? Here are some options:

• Work longer to increase the percentage of his high-three average salary used to compute his retirement benefit. Every year of additional service will increase the percentage by 2 percent, and, of course, the average salary will go up at the same time.
• Reduce his living expenses by paying off his mortgage prior to retirement, or using retirement savings to make mortgage payments. Since Rich has been saving the maximum in his TSP account, this account could be used to pay his housing costs.
• Consider relocating to a less expensive area.

There's one other option available to Rich, too. He could retire and start a second career.

Let's say Rich leaves government and finds a new job paying $65,000 a year. He'll continue to save the maximum retirement contribution (for 2009, that's $16,500, plus $5,500 in catch-up contributions -- the limit is the same for private sector 401(k) plans as for the TSP). His new employer offers a savings match of 6 percent of his salary. In addition, he will be contributing to Social Security, giving him the credits he needs to qualify for a Social Security retirement benefit.

Here's how Rich will benefit:

• After four years, he will have $2,400 per year more in Social Security retirement benefits (this includes the modified computation due to the windfall elimination provision).
• He'll be able to put away $22,000 a year in retirement savings, and get $4,000 in matching funds from his new employer. Over four years, that adds up to $104,000 (plus some growth on his investments -- we can surely hope for growth, can't we?).

Lessons Learned

Here are the morals of this story:

• If your retirement is not enough today, there is always tomorrow.
• If you have an opportunity to work after you retire instead of continuing your federal career, it might be worth considering, as long as you don't expand your lifestyle to match the expanded income.
• Having some savings set aside in addition to your CSRS retirement will allow a cushion for paying down debt and creating additional retirement income.
• Even though the Social Security benefit may not be substantial, a CSRS retiree who has enough Social Security credits to qualify can create additional retirement income as well as cover the cost of Medicare Part B at 65.
• Try to eliminate as much debt as possible prior to retirement and maximize retirement savings. This will make retirement more affordable.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.