How much in TSP to get 80% of High 3

[Dooper]

80% of final income is often cited as a goal for retirement. Assuming FERS retirement after 30 years, includingthe SS leg, how much will you need in TSP (as a % of High 3) to generate inflation adjusted pre-tax income equal to 80% of your High 3? Feel free to guess if you haven't crunched the numbers.

[Birchtree]

Wonder Woman,

You can handle this one - it is multifaceted in requiring an answer. Maybe I'll come back after some of the gaps have been filled. First, Dooper, do you like paying your current tax bill? That will more than likely continue even in retirement if you concentrate only on income. The TSP doesn't really produce income - oh maybe in the G fund - but otherwise you are tied to the economy. There will be a required minimum distribution you'll have to take - your Uncle will want some of that deferred income in taxes. You have some planning to do - provide more information. Thanx

Dennis

[GALLO1]

Dooper wrote:
80% of final income is often cited as a goal for retirement. Assuming FERS retirement after 30 years, includingthe SS leg, how much will you need in TSP (as a % of High 3) to generate inflation adjusted pre-tax income equal to 80% of your High 3? Feel free to guess if you haven't crunched the numbers.
Dooper,

This might help. It's a pretty nifty tool.

· Go to TSP homepage that can be accessed from this site.

· Go to calculators

· Go to retirement planning

· Go to Ballpark Estimate Calculator

· Once you are in Ballpark, go to interactive ballpark

You can put indifferent kinds of scenarios based on your personal data.

Let me know what you think.:^

[Dave M]

D, as your basic FERS annuity you will get 1% of your high-3 multiplied by years of service. (This is the 1% they take out every check.) After 30 years, you have 30%. You will get SS which will be about 20-25%. Adding, we get 50-55% from these two sources.

To get to 80%, we need 80 minus 50=30% from your TSP. Assuming you want to leave the principle amount intact, and use only the interest or earnings, and that thiswill be about 5% annually,that gives us the equation 5% of TSP = 30% of your high-3. Thus, TSP = 6 times high-3.

That means if you have six years income in your TSP on the date you retire, you will have reached your goal. If you think earnings will be better, say 8% rather than 5%, then four years income will suffice.

Right now I have twotimes my base pay in my TSP. My goal is to get that up to four, but my income keeps increasing!

Dave

PS -- If you are contributing 15% of your base pay now, and then maybe some additional catch-up contributions later on, you already AREliving on 80% of your pay, and thus will suffer no diminution of life style.

[Dooper]

Dave: Your calculation makes sense; however, I think that the current literature recommends a withdrawal rate of about 4% to insure that the withdrawals can rise with inflation and won't dissipate the fund. Also, since SS must have an upper limit, the higher the high 3, the more you will need in the TSP. I get about 5 times the high 3 for a $50M High 3 and 10 times for a $100M High 3.

Do you think the 5-10 times High 3 is achievable with a 5% employee contribution and 5% match?

[Dave M]

There are ways to manipulate the result.For example, if you plan to retire at age 60, or when first eligible, then your service credit is 1 year per year. But if you wait untilage 62, your service credit goes up to 1.1 years per year. Thus if youwait until 62 with 32, to retire, then your service credit would jump from 30 to 32+3.2=35.2, a 17% increase. In those two years, your high-3 would advance by 5-6% due to COLA's, turning the17% into18%.

So by working two more years you can increase your basic FERS annuity by 18%. As well, during those two years -- peak earning years -- your TSP account willincrease by the amount of your contributions and internal growth, say 10-12%. In my case, when I do the numbers it works out to a 25% increase in my bottom line,by staying just two more years. Very tempting.

Currently the maximum benefit under SS is around $1800 per month. What it will be in 30 years is anyone's guess. As I plan to retire in5-7 years, I believe I can count on that 1800 going up to maybe 2000 which will work out to 25% of my gross at that time. This is where I got the 20-25% figure I used earlier. You should probably use a smaller number for SS, like 15%; that seems to be the direction we are going, long-term.

You are right regarding inflation protection. You will need to include some growth-type assets in your mix, along with the income-producing assets. However, I think you are being too conservative with your 4%. Think about it -- in times of inflation, interest rates rise and thus yields also. And besides, would it be wise to leave the ENTIRE kitty to your heirs and assigns? You earned it, you should be the one using and enjoying it. I would be comfortable eating into the principleby a small amount each year if I had to, say 1/20th or 5%. If I did that, my income from the TSP would increase from 5% to 10%.

So as I say, there are ways. But there is only one way to get there and that is by contributing. It takes money to make money. You should be doing much more than 5%.If that is where you stand at present,increase that to 10% as soon as you can, like after the first of the year when your COLA comes through, and after your anniversary date when you get a step increase. Then next year do the same. Keep going higher as fast and as long as you can; if you get into an emergency you can always reduce that figure (temporarily!).

For my part 4xhigh-3 is about the best I can do. Good luck!

Dave

[Mike]

Yeesh. If I worked for the gov't until I'm 62, that'd be 38 years of service (with 37 1/2 years at max witholding). :shock:

If Congress has its way it will be age 69 or 70 :shock:.

[Mike]

Congress can bite me. :P

Dave M wrote:
D, as your basic FERS annuity you will get 1% of your high-3 multiplied by years of service. (This is the 1% they take out every check.) After 30 years, you have 30%. You will get SS which will be about 20-25%. Adding, we get 50-55% from these two sources.

To get to 80%, we need 80 minus 50=30% from your TSP. Assuming you want to leave the principle amount intact, and use only the interest or earnings, and that thiswill be about 5% annually,that gives us the equation 5% of TSP = 30% of your high-3. Thus, TSP = 6 times high-3.

That means if you have six years income in your TSP on the date you retire, you will have reached your goal. If you think earnings will be better, say 8% rather than 5%, then four years income will suffice.

Right now I have twotimes my base pay in my TSP. My goal is to get that up to four, but my income keeps increasing!

Dave

PS -- If you are contributing 15% of your base pay now, and then maybe some additional catch-up contributions later on, you already AREliving on 80% of your pay, and thus will suffer no diminution of life style.

This is great advise. But it is assuming that you will taxed when you take it out at recent tax rates (they may be at 78% in the future).

Dooper wrote:
80% of final income is often cited as a goal for retirement. Assuming FERS retirement after 30 years, includingthe SS leg, how much will you need in TSP (as a % of High 3) to generate inflation adjusted pre-tax income equal to 80% of your High 3? I drool with envy at people in CSRS, but I think even they have to work 40 years to get a retirement of 80% of final income.

Dooper wrote:
Dave: Your calculation makes sense; however, I think that the current literature recommends a withdrawal rate of about 4% to insure that the withdrawals can rise with inflation and won't dissipate the fund.The major problem in planning for retirement is not knowing exactly when you are going to die.

greg wrote:
Dooper wrote:
Dave: Your calculation makes sense; however, I think that the current literature recommends a withdrawal rate of about 4% to insure that the withdrawals can rise with inflation and won't dissipate the fund.The major problem in planning for retirement is not knowing exactly when you are going to die.
Bingo that will be the problem if you opt out of social security.

Great point Greg!!!!!!!!!!!!!!!

How can you opt out if you do not know when you are going to die, what the tax rate will be in the future and what will inflation do to your savings???

You have this great private account. However the private account will not have a COLA index. Think about it? People retired in 1970 on 100K. What is 100K getting you in 2005? What will 2005 money get you in 2035? Maybe a park bench if you are lucky.

[biggdog1]

Dooper, I'm CSRS withNOSS coming in the future. TSP is extra. I know this is not real advice, but I'll get a cardboard sign before I get back in the workforce. I'll be retiring Dec06 or May06 with 37+ years. Take care.:^

[Mike]

DMA wrote:

Bingo that will be the problem if you opt out of social security.

Great point Greg!!!!!!!!!!!!!!!

How can you opt out if you do not know when you are going to die, what the tax rate will be in the future and what will inflation do to your savings???

You have this great private account. However the private account will not have a COLA index. Think about it? People retired in 1970 on 100K. What is 100K getting you in 2005? What will 2005 money get you in 2035? Maybe a park bench if you are lucky.

Point 1: I'd opt out immediately (then I'd actually have ownership of the account, much like my Roth and TSP). An uncertain future is a fact of life. As long as I'm in the social security system, I am totally at the whim of Congressional(in)action. They can vote to cut benefits at any time, they can change how they are indexed, they can change the retirement age...at least withthe general tax rate, I only have one thing to worry about rather than worrying about how they'll change the programandwhether or not they'll raise income taxes. I'll just save and invest as much as I can while I'm working and figure that'll keep me adequately covered regardless of what happens down the road. The gist of what I have read in columns written by investment advice-givers for the local newspapers is that one *generally* assumes that s/he will take home less money in retirement - and therefore will be in the same (or lower) tax bracket (it is unlikely that Congress would be stupid enough to jack up the income tax rate to 70% on middle class wage earners, since this group constitutes a huge swath of the electorate). They also recommend taking full advantage of both tax deferred IRA's and Roths. For many people (myself included), maxing out the contribution to a tax deferred account is the best way to lower tax liability when one does not qualify for the litany of itemized deductions and has to settle for the standard.

Point 2 regarding 1970 retirement and the absence ofa COLA: well, that might have something to do with the fact that $100k in 1970 had about $500k in purchasing power using today's money. A person can retiresomewhat comfortably onhalf a million bucks. Source: http://eh.net/hmit/ppowerusd/ (http://eh.net/hmit/ppowerusd/)

As for the COLA, the idea is that the private account would not require one due to the historical return of the market trumping that of Social Security by a wide margin.

[Dave M]

Well Dooper, you have our attention. What do you say? D

[theoguins]

41 yrs, 9 mos. to be exact........

[Brett]

I hope to retire in seven years as a CSRS employee. Yes, I will be getting roughly 2% a year for 35 years of service. Add what I hope will be about a years worth of sick leave, making it 36 years. But, I have not received any matching TSP contribution. I also have been limited as to what percentage I had been allowed to contribute. That said, with no SS to rely I hope to have 72% of my high three with my meager TSP fund.

[EW_ret]

If you examine net retirement pay and compare with your current take-home pay you would be surprised! I retired last year as a CSRS annuitant with 36 years service and nine months of sick leave. This equated to 69.6% of my average high three. When I compared the net pay of my retirement annuity and my final salary net pay, the annuity net was about 76% of my final salary net, without subtracting the TSP contributions of 10% from my final salary. When I factored in the TSP contributions into my salary, my retirement annuity net pay was 85% of my final salary net pay.

In retirement, I’ am not contributing to TSP (10%), CSRS Fund (7%), SS Medicare (1.45%), and my federal and state taxes went from 23.5% of salary to 19% of annuity. I even added into my final salary the benefit of having a non-taxable federal health insurance premium ($510/yr) and medical flexible savings account of $1,500 (+$506/yr).

All these figures do not take into account any withdrawal from my TSP account. If I were to withdraw 5% of balance yearly, this would add another 10% of net income to my net annuity yielding 86% of final salary net without subtraction the TSP contributions from salary.