When Can You Afford to Retire?

Would you like to retire at your minimum retirement age (55-57, depending on your year of birth) under the Federal Employees Retirement System? That decision will depend not just on your age, but whether or not you can afford to leave the working world behind.

The three parts of FERS retirement—an annuity (including a supplement for some of those who retire early), Social Security benefits, and personal investments in the Thrift Savings Plan—were designed to work together to provide the income needed in retirement.

How early you personally can comfortably retire requires asking yourself the following questions:

• How much income will you need to cover your expenses?
• Will you have enough income to last the rest of your life?
• Have you considered the tax implications of your financial decisions?
• Have you accounted for future inflation?
• Have you factored in unforeseen future events, such as the potential need for long term care and the volatility of your investments?
• Do you plan to continue to work after you retire from federal service?
• Can you afford to delay claiming Social Security retirement?
• Do you understand how much net income you’ll get from your FERS retirement benefit after reductions and withholdings?
• If you are married, have you considered your income requirements while you and your spouse are both living, but also when one of you may become the survivor?
• Do you have others who depend on you for financial support?

Let’s consider the case of Joe, a federal employee covered under FERS who has 35 years of federal service and is unmarried. His current salary is $99,741 per year. After withholdings for retirement, taxes and insurance, his net income is $2,062 biweekly, or about $4,500 a month. Here’s what his retirement would look like today at age 57:

• His FERS retirement benefit will provide 35% of his high-three average salary of $94,506. That’s $33,077 a year, or $2,756 per month. After withholdings for federal and state income tax and insurance benefits, Joe’s benefit will provide him with a net monthly income of $2,082 a month.
• He will be entitled to a FERS supplement that will provide about $1,600 a month. After taxes, it will add about $1,250 per month to his benefit, for a total of $3,332. That’s within $1,168 of his current net income. 
• Let’s assume Joe has saved $300,000 in his TSP account. If he begins to withdraw $1,500 a month from his savings to produce enough income after taxes to meet his current needs, he will run out of savings before he turns 80—even if he earns a 3% average rate of return. Joe could use the TSP life expectancy calculator to lower the amount of these withdrawals. Or he could use the $300,000 to purchase a life annuity from the TSP’s annuity provider. But the annuity options would not produce $1,500 a month in income. 

Can Joe afford to retire at 57? That depends on a number of factors:

• Are his living expenses going to go down once he is retired? He could downsize to a less expensive home, or move to a state without income tax.
• On the other hand, might his living expenses increase? Suppose he wants to travel, buy a boat, or provide financial support to family members.
• Has he accounted for the fact that his FERS retirement benefit will not receive a cost of living adjustment until he turns 62? As a result, he may need to withdraw more from his TSP than he currently needs. 
• Does he plan to work after he retires? If so, that could delay the necessity to withdraw from his TSP and increase his future Social Security retirement, but he might lose the FERS supplement due to the earnings test.
• Will he need long-term care in the future? 
• Does Joe have a former spouse? He may have to provide a portion of his retirement and survivor benefits to them.

As you can see, there are many considerations to take into account when planning for retirement. In this example, Joe may not be able to afford to retire at 57 unless he’s willing to make some sacrifices in how much he can spend or be willing to continue to work after his federal retirement.

Remember, the earlier you begin to save for retirement, the less you will have to save overall due to the compounding of your investment over time. In addition, if you’re covered under FERS and you save 5% of your biweekly salary, you’ll receive 5% in automatic and matching agency contributions.