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Federal Retirement Income Calculator: Financial Planning Resources for Federal Employees
Planning for retirement is a crucial aspect of financial management, especially for federal employees who have unique benefits and considerations. Federal retirement income calculators can be an invaluable tool in this process, helping individuals understand their potential retirement income and make informed decisions about their financial future. This article explores how these calculators work, the key sources of retirement income for federal employees, and the top strategies for effective retirement planning.
Gearing up for retirement from the federal government? Attend a free online federal retirement seminar.
Federal Retirement Income Planning: 4 Key Strategies
Managing income sources in retirement is one of the most important elements when federal employees are building a successful retirement plan. After working with thousands with of federal workers, we have found there are 4 key areas that are often overlooked or misunderstood. Here they are:
1. Evaluating Annual, Not Just Monthly, Expenses
Too often, federal employees focus on the main monthly expenses when formulating their budget: car payments, mortgage payments, insurance, utilities, and so on. However, successful financial planning requires you take annual and semi-annual expenditures into account as well. This includes things like Christmas gifts, vacations, car repairs, and home improvement projects. After this is done, proper evaluation can be conducted to figure out which monthly and annual costs can be eliminated, which can be reduced, and which are necessary. Take vacations, for example. To some, vacations in retirement are not a priority and can be reduced or completely eliminated. For others, traveling is a significant budget item, whether it is to a specific destination or just to see different parts of the world. Either way, not taking this expense into account and only focusing on a monthly budget when strategizing retirement income can be detrimental to a formulating a successful retirement from the federal government.
Try our Federal Retirement Benefit Calculator to estimate your FERS pension amount.
2. Don’t Underestimate Taxes and Healthcare Costs
A mistake that some federal employees make when creating their financial plan for retirement is not looking at net or take-home pay. All three main sources of income for a FERS retiree are potentially subject to federal and/or state taxes. The FERS pension is taxable as income, Social Security benefits are potentially taxable (although the rules can get complicated), and withdrawals from qualified TSP money (traditional, as opposed to Roth funds) are subject to taxes as well. Looking only at the gross amount when financially preparing for retirement is a mistake too many retirees make.
Check out this article about how the FERS supplement is taxed.
On top of that, healthcare expenses are often underestimated, too. If you choose to keep FEGLI in retirement without reducing coverage, for example, the premiums get exponentially more expensive in older ages. FEHB premiums also gradually increase with age and healthcare needs in general grow in retirement, leading to even more costs. And finally, many federal employees don’t realize their health premiums with FEHB are no longer paid with pre-tax dollars after retiring.
3. The Standard 4% Withdraw Rule Has to Be Used Correctly
In general, wise advice for managing retirement investments and withdrawals is to follow what is known as “the 4% rule.” What this means is that during the first year in retirement, 4% of the total balance is taken out (so $40,000 if your retirement assets total $1 million) and then continue with this amount in subsequent years, with adjustments for inflation. The idea is to ensure these assets last throughout retirement, or at least for a decade or two. While there are arguments to be made for 3% or 5%, the 4% rule is a widely accepted financial planning concept. What is often not full comprehended is that the rule is based of a 60-40 portfolio, meaning retirement savings are invested in 60% stocks and 40% bonds. And even then, depending on which equities and fixed income products are used, the returns may vary greatly. Without getting too deep into the topic, it should be considered that with a portfolio that is too conservative (such as 80% bonds and 20% stocks), the 4 percent withdraw rule will drain retirement accounts quicker than anticipated.
How 4% Rule Can Reduce Retirement Income without Proper Investment Management
The following chart is for illustrative purposes only, and shows how the 4% rule can reduce your account balance more drastically without enough investment growth. Without considering taxes or inflation, and assuming a 10% return rate annually for a portfolio that is 60% stocks and 40% bonds, and 2% yearly return for a portfolio with 20% stocks and 80% bonds, the chart illustrates what happens to each portfolio when withdrawing a steady 4% at the beginning of each year. After three years of growth and four 4 percent withdrawals, the difference between ending balances is almost $25,000.
| 60/40 Portfolio | 20/80 Portfolio |
Beginning Balance | $100,000 | $100,000 |
-4% annual withdraw | $96,000 | $96,000 |
Annual Investment Growth | $9600 | $1920 |
Balance after One Year | $105,600 | $97,920 |
-4% annual withdraw | $101,600 | $93,920 |
Annual Investment Growth | $10,160 | $1878.4 |
Balance after Two Years | $111,760 | $95,798.40 |
-4% annual withdraw | $107,760 | $91,798.40 |
Annual Investment Growth | $10,776 | $1835.97 |
Balance after Three Years | $118,536 | $93,634.37 |
-4% annual withdraw | $114,536 | $89,634.37 |
4. You Need to Talk with Financial Advisor that Specializes in Federal Employee Benefits and Retirement Planning
For retiring federal workers, planning a prosperous retirement often requires a professional that is an expert in the federal space. A financial planner can help guide you not only through three key concepts above, but with all aspects of your federal retirement benefits package. The advisors at PlanWell financial have not only developed a Fed-Expert Retirement Blueprint for Federal Employees, but are also Certified Financial Planners (CFP®) and Chartered Federal Employee Benefits Consultants (ChFEBC℠). They adhere to a fiduciary standard as they are Accredited Investment Fiduciaries (AIF®) and can help you design a “rhythm of income” in your retirement, strategically crafting a plan that accounts for your FERS pension, TSP, Social Security, tax bracket, and a whole bunch more. Schedule a Meeting today!
Best Federal Retirement Calculator for TSP and FERS
A federal retirement calculator is designed to help federal employees estimate their retirement income based on various inputs. These calculators take into account factors such as current age, retirement age, pre-retirement income, and expected sources of retirement income. By inputting this information, individuals can get a clearer picture of their financial future and make necessary adjustments to their retirement planning strategy.
Learn why the FERS Calculator at PlanWell is one of the best online.
Civilian and Military TSP Calculator
Retirement calculators can be a powerful tool in planning for retirement. They provide a clearer picture of what to expect in terms of retirement income and highlights areas where additional savings may be needed. By using this calculator, federal employees can set realistic retirement goals and develop a comprehensive plan to achieve them. This proactive approach to retirement planning can help ensure financial security in retirement.
The Thrift Savings Plan Calculator tool at PlanWell is for civilian and military employees.
How Much Federal Employees Need to Save for Retirement
Determining how much to save for retirement is a critical aspect of retirement planning. Several factors influence this decision, including expected retirement age, lifestyle goals, and anticipated expenses.
Average Retirement Savings Needed
The average retirement savings needed can vary widely depending on individual circumstances. However, financial planners often recommend aiming for a retirement savings goal that can replace a significant portion of pre-retirement income. This typically means saving enough to generate 70-80% of pre-tax income in retirement. It’s important to consider factors such as inflation rate and life expectancy when determining how much to save for retirement. Whether you keep your money in the TSP or move it to an IRA, having a fed-expert financial planner can make a world of difference.
Other Sources of Retirement Income to Consider
In addition to social security and federal pensions, federal employees may have other sources of retirement income to consider. These can include personal savings, investments, and annuities. It’s important to have a diversified income strategy that includes multiple sources of retirement income. This diversification can help mitigate risks and ensure a stable income in retirement.
Setting a Realistic Retirement Goal
Setting a realistic retirement goal involves assessing current financial status, future income needs, and potential sources of retirement income. A retirement income calculator can be instrumental in this process, providing a clear picture of what is achievable based on current savings and expected income. It’s important to regularly review and adjust retirement goals as circumstances change, ensuring that the plan remains aligned with personal objectives.
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Frequently Asked Questions: Retirement Planning Strategies for Federal Employees
What Is the Ideal Rate of Return on Retirement Accounts?
The ideal rate of return on retirement accounts depends on individual risk tolerance and investment strategy. A balanced approach that includes a mix of stocks, bonds, and other assets can help achieve a favorable rate of return while managing risk. It’s important to regularly review investment performance and make adjustments as needed to keep up with inflation and changing market conditions.
How to Plan for Monthly Retirement Income Distribution?
Planning for monthly retirement income distribution involves determining how much income is needed to cover expenses and ensuring that withdrawals are sustainable over the long term. This may involve setting up a systematic withdrawal plan that takes into account life expectancy, inflation, and other factors. A financial advisor can provide guidance on the best approach to monthly income distribution, helping to ensure that funds last throughout retirement.
What Are the Best Practices for Withdrawal Strategies?
Effective withdrawal strategies are essential for maintaining financial stability in retirement. Best practices include withdrawing funds in a tax-efficient manner, considering the impact of required minimum distributions, and balancing withdrawals from different accounts to minimize tax liability. It’s also important to regularly review withdrawal strategies and make adjustments as needed to reflect changes in financial circumstances and retirement goals.
Reach Out to Us!
If you have additional federal benefit questions, contact our team of CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Federal Employee Benefits Consultants (ChFEBC℠). We also hold the Accredited Investment Fiduciary (AIF®) designation. At PlanWell, we are federal employee financial advisors with a focus on retirement planning. Learn more about our process designed for the career fed.
Preparing for federal retirement? Check out our scheduled federal retirement workshops. Sign up for our no-cost federal retirement webinars using helpful online training. Make sure to plan ahead and reserve your seat for our FERS webinar, held every three weeks. Want to have PlanWell host a federal retirement seminar for your agency? Reach out, and we’ll collaborate with HR to arrange an on-site FERS seminar.
