Have I Won the Game?
I got the idea for this paper through a series of discussions with some potential retirees this week as well as a good friend of mine who’s starting to evaluate whether he’s won the game. So thanks, AB!
People hire me because they don’t know if they can retire. That makes total sense. Of all the government training we get, almost none is in the area of the one thing that affects literally every single one of us—our FERS benefits. There are people out there working longer than they have to. Others working blindly toward some undefined, unknown finish line. Maybe they’d leave today if they could? Maybe they think they can leave soon, but are totally wrong? How is someone to know? Can we put some hard data on paper to help these folks?
We sure can. Absolutely. Read on.
First off, I am going to use generic numbers. Very realistic, but generic, nonetheless. However, tens of thousands of you will read this. So, for many of you, these numbers are too low. For many others, they are too high. Regardless, the point is not that I’m going to give you YOUR specific numbers. The point is that I’m going to show you how to evaluate your numbers once you get them.
“Chris, define winning. What do you mean by that term?”
For the purpose of this paper, what I mean is simply this: You can afford to retire, not work, and maintain your current level of income. A very clearly defined accomplishment. Two keys there—don’t miss them. NOT WORK yet MAINTAIN CURRENT INCOME LEVEL.
To me, that is winning the retirement game. You can cash in your chips and live your life, unencumbered by some arbitrary rules at a job where you toil to make someone else’s dreams come true, or you fill a cog in some great, sprawling bureaucracy, as replaceable as a double A battery. You might want to work, but you don’t have to.
“Chris is that even possible??!!”
People do it EVERY. SINGLE.DAY.
THE MATH
Let’s look at some numbers. Let’s assume you’ve done your due diligence. You’ve gotten a retirement estimate from your agency, you’ve used the free spreadsheets on my website from the great John G., and maybe you’ve hired me too, or you’ve just done some of your own math independently. (You should do as many of these as you can. The more data points the better.) And all that data leads you to the following:
If you retire this year, you’ll only be about $50,000 short annually of what you’re making right now while you work. In other words, you need to make $50,000 in retirement to have no loss of current income. Now, you won’t find this on your agency estimate from GRB or FedHR Navigator, but you’ll find it on John G’s spreadsheets, you’ll find it on Page 14 of one of my estimates, and you can certainly find it by doing your own math (which you absolutely should). Anyway, in this case, for the sake of this exercise, we’ve established that $50,000 is your target number to make up in retirement.
You can go get a job that pays $50k and now, combined with your retirement check, you’ll be bringing home exactly what you’re bringing home now. AKA, no loss in income. But we aren’t talking about working are we? We don’t want to! So, let’s put this option on the shelf for now, and take a look at our TSP. Can that help us?
You look at your TSP and see that you currently have a balance of $1.25 million in there. That’s a lot of money. But what exactly does that mean? Is it safe to take money out of it? If so, how much? Well, ideally you’d go speak to your financial planner to help walk you through this. But for our purposes, let’s say we go with the common 4% safe withdrawal rate. At the risk of oversimplifying, this rule of thumb says you can safely withdraw 4% of your balance in a year and have roughly a 97% chance of never running out of money. (Yes, Michael Milkens, I know there’s a lot more to it!) Ok, so what’s 4% of $1.25 million?
$1,250,000 x .04 = $50,000.
Done.
You’ve won.
If you need $50,000 to make up what you currently earn, and your TSP allows you to safely withdraw $50,000 a year, you have fully replaced your income without working anymore. And without doing irreparable harm to your TSP.
If you’ve got your head down, working like crazy with no clue as to where the end is, you may very well have crossed the finish line without even knowing it! I speak to people all the time that are in this spot.
Now, for your arguments:
“Chris, who only needs to make $50k a year to make up the shortfall in retirement?”
Plenty. PLENTY! Lots of you. However, like I said all of these numbers will be different for you. I talked to an FBI agent this week who only needs to make up $30k in retirement. Some of you may need to make up $70k. The point is not that all of you need to make $50k, the point is you need to first know your target number. You can’t make any educated decision on staying or going until you know that number first.
“Chris, my TSP balance isn’t anywhere near that high!”
Fine. What is your make up number first? Many of you won’t need to make up $50k either. But let’s say it’s $50k still for sake of argument. And you only have $800k in your TSP. 4% of $800k is only $32k. You can only safely withdraw $32k. So you are $18k short to get up to $50k ($50-$32). Are you telling me that’s not doable? You can’t do something you love to do for $18k a year? What about this—can you cut back on expenses and monthly saving enough to make up the $18k difference? I find that a lot of people can lower their spending to a point where it’s almost equivalent to a part-time job. One person told me this very week that the savings on daycare expenses for 2 kids alone will make up the difference now that the father will be staying home.
“Chris, but if I take out $50k from TSP, won’t that put me over the earnings test limit for the Supplement?”
No. TSP withdrawals don’t count toward the earnings test.
“Chris, I’m over 62 and my annuity by itself is a lot lower since I don’t have the Supplement.”
Understood. But you’ve got something worth more than the Supplement—the ability to file for Social Security. In fact, the entire point of FERS was that the 3 sources of income (Annuity, SSA and TSP) would replace your income.
“Chris, I don’t feel comfortable taking out 4% already when I’m only 50 years old.”
Another valid point. Go talk to a financial planner. Maybe you’ll feel comfortable with only 3% and then getting a part time job for $20k. While not technically winning by my definition in this article, I would venture to say all your friends are still going to be incredibly jealous of your lifestyle while they continue to put in 40-50 hour weeks, and you work 2 days a week at the golf course.
“Chris, I’ll be bored if I retire.”
I can’t help with that. If you’ve got no interests, hobbies, missions, projects, diversions, or dreams, might I (as kindly as possible) suggest that money isn’t the problem you should be focusing on right now?
“Chris, I did the math over and over and the numbers don’t work for me.”
Fair. This is undoubtedly going to be some of you. And math is math. We can’t argue with it. But at least you know now. The exercise still has tremendous value. You now know what your target number is. And you can revisit that over the years to see if you are closer. Or, (again while not the technical definition in this paper), if you need to make up $50k and you know of a job out there you can retire and get at $70k, then man, that’s not a bad deal either! You’ll be giving yourself a $20k a year RAISE over what you’re making now! And, just as important, you won’t be touching your TSP at all; you’ll be letting that sucker grow!
“Chris this sounds too good to be true.” or, a variation on that theme, “Chris, everything looks good, but I’m still nervous.”
100% absolutely totally normal. It would be odd if you weren’t nervous, actually. So what is the biggest weapon against anxiety? Math. Math is devoid of feelings. Math isn’t biased. It’s not pushing you one way or the other. It’s the straight dope. And if it holds up, it holds up. Under the most intense scrutiny. So do the math. Over and over. And then toss it all out, and start all over again. And then let it marinate for a few days, and come back at it again from another angle. Have your spouse poke holes in it. Have your geeky friend poke holes in it. Have your financial planner poke holes in it. Don’t trust it. Run it again.
Eventually, one of two things will happen. Either you will find out you made some errors somewhere in the math and you’re not capable of retiring now. Or it will hold up to even the most rigorous testing and you’ll know for a fact that the numbers work out.
I’ve been doing this for years. You can try to talk yourself into being ok. You can give yourself pep talks. You can try all kinds of self-help. It won’t work. You’ll still worry. I’ve never seen anything else that defeats anxiety more than math. It’s worry’s kryptonite. Because it’s brutally honest and doesn’t care one bit how you feel, or how you hope it works out. Math is math.
SUMMARY
FIND YOUR SHORTFALL
DETERMINE IF YOUR INVESTMENTS TAKE CARE OF YOUR SHORTFALL