Don’t Let Your Mind Get In the Way of Smart Decisions

The Boston College Center for Retirement Research provides a wealth of data about income in retirement. Their mission is to help people make better decisions, but the center’s work goes beyond economics. They study behavioral factors and attempt to craft solutions that work in practice, not just in theory.

A big challenge for federal employees is that the retirement period can last as long or longer than a federal career. Many federal employees play it too safe when it comes to investing. Some don’t view their Thrift Savings Plan investments as additional income that can supplement their Federal Employees Retirement System basic retirement benefit along with Social Security benefits. Instead, they want to continue to let it grow after they have fully retired, which means they may be sacrificing a more comfortable retirement. Others may retire too early when it would pay to stay employed just a few years longer. In other words, our minds can get in the way of a successful retirement.  

Curious Behaviors That Can Ruin Your Retirement is an interactive program designed by the Center for Financial Literacy at Boston College that highlights behavioral impediments to retirement planning. A host leads users through exercises designed to create “aha!” moments regarding such behavior, followed by explanations of how the behavior can hinder planning and how to cope with it. The goal of this tool is to learn more about yourself so that you can make better financial decisions.

There are a number of key questions to consider:

How many years will you have?

According to the Office of Personnel Management, in 2016 the average age of federal employees taking normal retirement was 62.8; in 1990 the average age was 59.4. This increase may be due to more Civil Service Retirement System beneficiaries retiring in 1990 than in 2016 (FERS replaced CSRS in 1987 as the federal retirement benefit). As a single-benefit retirement plan, CSRS incentivized an earlier retirement since there was not a reliance on Social Security or retirement savings to achieve an adequate retirement income. In contrast, FERS is based on a three-tiered retirement system that includes Social Security, which has a minimum retirement age of 62.

While more feds are delaying retirement, they’re also living longer. According to the Social Security Administration, a man reaching age 65 today can expect to live, on average, until age 84.0. A woman turning age 65 today can expect to live, on average, until age 86.5. And those are just averages. About one out of every three 65-year-olds today will live past age 90, and about one out of seven will live past age 95.

Are you rational or impulsive?  

The Center’s tool explores this question by asking: “Did you know that when your brain is stressed by trying to stay rational that you may become more impulsive?” A common example of this happens with the annual open season for the Federal Employees Health Plan. There are so many choices that many people end up staying with the same plan year after year—it’s just too hard for the rational mind to weigh all the options. The TSP alleviates this dilemma by offering only five core funds: G, C, S, F, and I. Having fewer choices may prevent the stress often seen when we are faced with too many choices.

Impulsive behavior can sometimes be linked to problems with delayed gratification. It is hard for many in their twenties to start saving money for an event 40 years into the future. The TSP was designed to encourage young federal employees to save for retirement by providing matching agency funds to complement the employee’s willingness to set aside 5% of their salary for the future. In addition, the loan program was implemented to allow employees to borrow from their TSP, if necessary, for an emergency or even a down payment on a first home, or to pay off a college loan. The good news is that according to recent statistics, the number of federal employees covered under FERS who save in the TSP is at 90.7% of all employees. Only 2.4 percent of new hires are opting out of the automatic enrollment that deducts 3% of basic pay each pay period.   

Do you consider 3% to be a small number or a big number? Small increases compounded over time will become big numbers. Use the TSP calculator to see how much your TSP will grow over your career. The TSP website shows the benefits of compounding over time: If you saved $3.50 a day by skipping the coffee shop on your way to work, you could save $105 a month. That would compound with 6% interest to more than $200,000 in 40 years.

Are you an optimistic person?  

There is such a thing as being too optimistic. For example, the study points out that 94% of drivers think they are above average. Statistically speaking, that is impossible—only 49% of us can be above average. Do you think that you will never need long term care, or that if you do, your spouse or children will provide that care?  Do you think that once your mortgage is paid off your surviving spouse will no longer need a survivor benefit? Because you’re healthy at age 65, do you think Medicare Part B is an unnecessary expense? These are some of the common examples of being too optimistic that I observe in federal employees who are planning for retirement. It is important to take reasonable precautions—that’s where unreasonable optimism can stand in your way.  

One of the things that I hear over and over again is that things have changed—working in government today is different than it was 30 years ago. That feeling could motivate you to retire sooner than you should. Do you have a problem working for someone 30  years younger than you? Don’t let your pride get in the way of your financial security.

Are you ready to start spending the money that you’ve saved for retirement? Or are you going to delay spending your savings because you might need it when you’re older, or maybe you want to leave that money to your children or your favorite charity? Most federal employees have done a great job of accumulating retirement savings in the TSP.  As of the end of February, there was more than $572 billion invested in the TSP. The number and amount of withdrawals have been steadily increasing as well. But more education is needed to help retirees manage those withdrawals so their TSP account lasts as long as they will.

You may want to use this tool to help figure out how your thinking could be standing in the way of retirement success. There’s no time like the present to prepare for the future.