As financial professionals who specialize in helping government employees transition from work to retirement, we understand that you may have questions about when and how you can retire. We strive to address some common questions and present strategies that can help prepare for a more comfortable retirement.
In today’s volatile markets and uncertain economic conditions, the retirement dream can seem elusive. Many Americans are worried about whether they can afford to retire and want to know how to ensure that their savings last. Government workers have the added challenges of evaluating complex retirement benefits and making the most of their options when they retire. When taxes, healthcare, survivor benefits, and other options are taken into consideration, the right strategy could be worth hundreds of thousands of dollars over the course of a lifetime.
For those who have spent their careers in public service, retiring may involve a mix of emotions. You may be worried about the financial aspects of retirement, you may feel ambivalent about leaving a job you love and losing the camaraderie of your profession, and you may wonder about what you will do when you’re no longer working. These complex feelings are a normal part of the retirement process, but you shouldn’t allow them to put off developing strategies for the future. You have very important decisions to make about retirement; the most prudent course is to start thinking now about your retirement needs so that you can evaluate your options and make the right decisions when the time comes. We developed this special guide to help government employees understand their options and ask the right questions when developing their retirement strategies.
When can you afford to retire?
If you’re worried about being able to retire, you’re not alone. Millions of Americans are concerned about whether their retirement savings will be enough to keep them comfortable. In fact, many Americans fear running out of money more than they fear death. 1
Though Americans in public service have historically relied on comfortable pensions and retirement benefits, unfunded liabilities and major changes to the retirement landscape mean that government employees must carefully evaluate their financial options. The decision to retire is a very personal one that depends on a number of important factors like your age, years of service, financial circumstances, health, and family situation. It’s also important to understand the particulars of when you may be entitled to collect a retirement benefit from your pension or sponsored retirement plan. Each plan is different with respect to service requirements and retirement eligibility. A professional can help you understand the conditions under your specific retirement system.
If you’re evaluating the decision to retire, there are a few important steps that you can take now to determine whether you are on-track financially. While a financial professional can help you explore your personal situation in greater detail, you can get started by doing some simple calculations on your own.
Start by estimating your expenses in retirement. By adding up all of your basic living expenses and desired discretionary spending, you can develop a better idea of how much money you’ll need each month. To make it easier for you to accurately estimate your expenses in retirement, we have developed a Retirement Budget Worksheet that uses your current household expenses as a guide. Another quick way to evaluate your retirement expenses is to take a flat percentage of your current spending. We recommend using 85-90 percent of your current pre-retirement monthly spending to arrive at a conservative projection.
The second step is to identify any sources of income from Social Security benefits, a pension, and other sources. Any gap between your income and your expenses will need to be covered by withdrawals from your retirement savings. Understanding how much can be safely withdrawn each year during retirement without running out later in life is a complicated process Unfortunately, there is no simple formula or approach that you can use to determine a safe withdrawal rate. The “4 percent” rule became popular in previous decades and meant that retirees could safely take out 4-4.5 percent of their portfolio each year. In an environment of historically low interest rates and volatile markets, this rule no longer applies. It’s important that you take a personalized approach to your retirement income strategies. There are many online calculators that you can use to estimate how much you may be able to withdraw in retirement. A financial professional can help you understand how different factors affect your calculations and develop a strategy designed to balance your cash flow against the long-term preservation of your nest egg.
If you’ve run the numbers and think that you may have a retirement income shortfall, don’t panic. There are several strategies that can help increase your potential retirement income or reduce your expenses:
• Increasing your savings rate can help you make up a savings shortfall. Contribute as much as you can to your tax-advantaged retirement plans and consider opening a Roth IRA. If you are 50 or over, use catch-up provisions to boost your retirement contributions.
• Delaying retirement by working and adding to your savings can help your nest egg grow larger, increase your Social Security benefits (if you are under age 70), and shorten the amount of time your savings must last.
• Downsizing your home and living expenses is another option. Many retirees are empty nesters who can reduce their expenses by moving into a smaller home. Putting off major expenses in the early part of retirement can help you avoid depleting your savings too soon.
• Working during retirement can create extra income while keeping you active and doing something you love. Many public workers retire when they are still young and active, making a second career or part-time work attractive. While some take the skills they have developed into follow-on careers, others pursue passions for teaching, speaking, or take part-time jobs. Keep in mind that working while collecting may impact your Social Security benefits if you are younger than your full retirement age.
A financial professional can take a look at your overall circumstances and help you design strategies to maximize your income in retirement. He or she can help you maximize your Social Security benefits, protect your income, and develop an investment approach that helps balance the need for growth against your risk appetite, time horizon, and future goals.
Retiring With Debt?
Statistics from the Employee Benefit Retirement Institute (EBRI) show that many Americans in or nearing retirement are carrying high levels of debt.
If you have significant mortgage, student loan, or credit card debt, your retirement expenses may go up considerably. A financial professional can help you develop debt reduction strategies while still living a comfortable lifestyle.
Consider projected retirement expenses
• Basic expenses like housing, utilities, food, debt service, & other living expenses
• Lifestyle expenses like travel, philanthropy, gifts, & entertainment
Consider the type of income Available
• Social Security benefits
• Defined benefit pension income
• Income from other sources like rental properties, inherited IRAs, & part-time work