Advice needed from early Federal retirees

Hi all,

My husband is a federal employee, age 50, and I am his loyal wife, age 38 (yep, he's lucky!) Married 8 years, first marriage for both, no kids.

He is eager to retire at age 56, and I am very supportive. Lots of plans for travel and adventure await.

Here is what our financial situation will look like in 6 years when he is 56. Any comments or advice are appreciated:

1. FERS annuity w/ spouse benefit: $1100/ mo

2. TSP annuity w/ spouse benefit: $800/mo

(or could roll over $275K into IRA- advice here?)

3. SS benefits (at age 62): $1200/ mo

4. > $160K in Roth IRAs (combined) 6 years from now

We have lived in gov't housing for the past 8 years and do not own a home. We have $75K saved for a large down payment. Plans are to live in an area where home prices average $150-$200K.

I have a teaching degree and plan to teach when my husband retires and we don't live in such a remote location... so we will have supplemental income.

We live frugally would be quite happy living on a $24K/ year, but the catch is we don't own a home yet and will need to pay off a mortgage. We should have $100K saved toward a home by ER.

Thoughts?? Are we cutting it too close?

shanna

[sgeeeee]

Hi Shanna,

It sounds like you're plan is pretty close. Certainly, there are people who retire with less. Here are some concerns you might want to look into.

Do your annuities include a cost of living adjustment or are they fixed? You'll be retired for a long time (hopefully) and you need to account for inflation. The $1900 per month annuity payments will cover most of your $24K per year lifestyle requirements today, but a couple of decades from now inflation may have eaten away most of that buying power. Six years from retirement social security will help a lot and it includes a cost of living adjustment, but it only makes up about half of your spending requirements.

You have 6 years (the first 6 in retirement) of cash flow problems that are toughest. Your annuities don't quite cover your needs for that period of time (even before inflation) and you will need much of your portfolio cash to both make up the difference and buy that house. Have you accounted for insurance, real estate taxes, maintenance expenses on that house too?

You don't mention medical insurance. If your husband's federal employee benefits cover medical insurance in retirement, then that's great. If not, you better take a close look at that. Medical insurance cost is a scary part of early retirement.

How firmly do you believe in your $24K per year lifestyle? If you haven't already done it, it's a good idea to develop a good, detailed budget estimate. Start by tracking every penney you spend today by category, then extrapolate those costs to appropriate numbers in retirement. Don't forget those unexpected costs like fixing the air conditioner, replacing the car, etc. After you take a hard look at the numbers you may decide that $24K is an inflated number. You can be happy living off of less and you can take that into account in your plan. Or you may decide that you are cutting it pretty close and need to find a funding source for more lifestyle.

You can analyze your situation using FIRECALC to get a better idea of whether your situation is safe enough for you.
Good luck. And congratulations getting this far.

Salaryguru,

Thanks for the advice. Our annuities, as calculated, do include a COLA so the $19K will keep up with inflation. And we will have fed. employee health insurance after retirement, so that is covered.

Good point on outlining a budget including all home costs- it's surprising how expensive prop. taxes can be.

We need to look into long term care insurance, too, but otherwise feel ready to take the leap in 6 years.

Thanks,
Shanna

[Tadpole]

My neighbor is FERS and 55. He says that he thinks they will recalculate SS such that most Feds won't get anywhere near what they think. He cancelled his early retirement dreams. He doesn't care for the current government so his opinion is kinda angry. Apparently, the COLA for FERs is set at 1% below the one given for CSRS, another bone of contention (not caused by the current gov. but by a previous Rep. admin.)

However, despite his tirades, he might be right. When I look at the discussions at the think tank sites, it seems that the worse case scenario might lead to immediate reduced COLA (change in index might reduce projection for amount at retirement which would reduce amount at 62), change in algorithm (push more from seniors with other income sources to the poor while reducing total outlay), and/or increase in retirement age (could reduce benefit at age 62). Reduced COLAs would impact both current and near retirees substantially over time.

I have empathy for your neighbor. I don't really care for any government, although I recognize we have to have one. Anyway, my opinions are "kinda angry" also.
Prior administrations, current administrations, or
future administrations are gonna screw it up. Just
deal with it.

John Galt

tadpole and John Galt,

Thanks for your thoughts on SS for future FERS retirees and changes in COLA.

We were a little confused about SS benefits- at first we thought our benefits would be reduced by the amount of the FERS annuity. Then we realized that under FERS, the idea was that retirees get a 3-part retirement, no parts of which are adequate as stand-alone retirement plans (FERS, TSP, SS).

We could make do with reduced SS benefits, or draw on my (meager) SS benefits if they are completely taken away (unlikely, IMO. The fed retirees would organize a pretty hearty rebellion).

To hedge our retirement plans, we are maxing out ROTH IRAs and saving the max. in TSP during these last years of fed employment. The max for those over 50 will be completely lifted in 2 or 3 years, in my understanding- I need to check on the year. We will let the TSP balance grow for a few more years after early retirement (and live on my teaching income) before taking an annuity.

AH, the uncertainties of the current administration. The only thing that is certain is that someone else (I am rooting for a moderate like McCain....) will be president in 4 years.

[bruce1]

HI Shanna

I have observed that most COLAs lag behind true inflation by one or two percent at least here. ( I am in Canada.) I am looking at retiring next year at 51 or 52 and will have about 2200 monthly after taxes from a COLA pension and 300 month other income after taxes also. I also have $150000 in investments along with a paid for house so I should be OK but would not want to go with much less.

Try living on a reitrement budget for a year or two and see how it works. You will have to make adjustments for expenses that you will not have when you are retired and also expenses that you will have that you do not have now.

Good luck .

Bruce

[Zipper]

Bruce, at 51 or 52, you will exceed the dropout provision of CPP and begin to erode your benefits. You are allowed to cross out ~ 6 of your lowest or no contributory years. About age 54 would be the earliest you could collect the full amount at 60, minus the 30% early penalty.

Of course we all get OAS at 65, but that is a long way off.

Bruce, Congratulations. You have a nice plan.

One question on SS benefits that just occurred to me:

The projected benefits he would receive at age 62 ($1200/ month) are based on the assumption that he continues working at his present salary until he is 62 (my understanding from reading the SS benefits statement that he received).

If he stops working full-time at 56 and works part-time or not at all until age 62, how much will this impact those projected benefits? 6 years (age 56-62) at a low income might be devastating. Again, we don't absolutely need the entire $1200 to retire comfortably give our other income, but it would be a nice cushion.

Any resources that anyone knows of to figure this out, we appreciate your help.

shanna

Just found a nice calculator on the SS website. His benefits would be reduced from $1200 to $1060 per month if he stopped earning any SS taxed income at age 56. Not as bad as I would have guessed. He probably will do some consulting or p-t work to keep busy, so this may be not be much of a factor.

[bruce1]

Thanks Zipper At 52 I will actually have 10 low/no Contribution years for CPP. Some from college years. I am looking into how much that will affect me. I will have 31 years at maximum. Hopefully no worse than shanna's husband


Bruce

[Brat]

I am cynical about COLAs, they don't track with reality particularly when health care consumes a higher % that the overall population. The Fed LTC program isn't the cheapest, but it is top-notch.

I agree that the two of you need to try living on your retirement budget and take the budgeted $ that you will be spending on housing and add that to your down-payment reserve.

In addition to (and really a part of) the budget issue you will spend your time in retirement. That can stress both the budget and homelife.

A (cynical) CSRS Retiree

shanna,

My understanding is that the COLA on FERS annuities does not kick in until age 62, regardless of retirement age or years of government service. If that's true your husb would have 6 or 7 years with no COLA on his pension. Depending on what happens with our economy over those years, that might be a problem for you.

[indymom]

Brat
How did you become a cynical CSRS retiree? Have you been retired long? My husband has been for about a year, and we are still adjusting as it wasn't voluntary.

[ats5g]

shanna,

Here's the FERS info from the OPM retirement website.

You might also check into the Special Retirement Supplement, which your husband could be eligible for if he retires at 56 [being born b/w 1953-1964] with 30 years of service.

Billy is correct about not receiving the COLA until age 62 for regular FERS retirees.

- Alec

Billy and Alec,

Thanks for the information on the FERS COLA being delayed til age 62. That's definitely a consideration. I wonder how it is calculated at age 62- does the annuity simply increase based on one year's COLA (from age 61 to 62) or does it catch up for the previous 6 years. In other words, are we always going to be operating 6 years behind inflation rates, or will we catch up at age 62?

Thanks so much for that bit of advice. It's all factoring into our decisions (now we are considering going to Alaska for last 6 years to get the 25% COLA and max out FERS and TSP)

[yakers]

Quote:

I am cynical about COLAs, A (cynical) CSRS Retiree

As asked by another: Is there something in particular to be concerned about in CSRS retirement? I am 54 w/30+ years of service and I expect to retire in 2 or 3 years depending on younger sons college plans, he is in high school now. If I didn't have that issue I would probably retire today. My wife will retire in 2 years with a tiny teachers pension so we will have to live on mine but we can live very cheap and we expect to do missionary/Habitat for Humanity type work for a while, we can live very cheaply. We do own our home, have the pension and some savings, its not a lot but it looks like enough so I am interested in any CSRS issues that should effect my planning.

[Brat]

What concerns me is that CSRS is managed by the same Congress that manages SS. It used to be that a CSRS pension was as good as gold. Now I am not so sure.

The current administration is pushing the nation deep in to debt. With the universe of CSRS retirees shrinking daily what is there to prevent Congress from changing its provisions for budgetary reasons? We are no longer so numerous that we present a political problem.

I think federal retirees (CSRS or FERS) will be fine, especially if you are already retired. you are so much more secure than those with corporate pensions.

[Brat]

A healthy dose of concern by anyone on a defined ben. plan is wise. Corporations have been underfunding their plans, just like congress is doing with their pension plans.

I take nothing for granted. Those who wear a belt and suspenders rarely expose their tush.

Stash money in IRAs, pay off the house, live below your means. Those who know me know I am not a chicken-little, but they do know I'm frugal.