I CAN'T AFFORD TO RETIRE: a letter to federal law enforcement

I hear this refrain all the time--"I can't afford to retire!" Sometimes it's phrased a little differently: "Where am I going to go and make this same amount of money?" Or, maybe it's, "Once I get another year toward my High-3, then I can retire."

I want to put some solid analysis to these statements because frankly, many of the people I talk to can, in fact, retire when first eligible, they just don't fully understand the numbers. Hopefully I can shed some light on that in this paper, and give you a few things to think about. I realize that some of you can't actually retire--there's too much debt, or a divorce devastated you, or whatever. I get it. But that doesn't mean this paper isn't for you. If you're planning on continuing to work after the government, you might want to retire and start that career sooner rather than later. In fact, if you already know you'll need to work in retirement, I would argue it's in your best interest to leave absolutely as soon as you're eligible, and I'll explain why by addressing three of the most common excuses.

Excuse #1: Where Can I Go and Make the Same Amount of Money?

My response: Just about anywhere!

Understand that you don't need to replace your entire salary to be in the same financial position you are now (i.e., take home pay). Remember--you get a retirement check, right? In fact, in most of my analysis with government employees, I've found that if they get a job making 35% of what they're making now, they are actually just as well off. I'll walk through these numbers in a second, but what this means is that if you gross $130,000 a year in your government job, you'll need to find a job grossing $45,500 a year in retirement. And I think we'll all agree that's pretty doable. For many people, they can make that part-time, which offers the best of both worlds--less work, more annual income.

(I realize some of you will retire as GS-15's and some as GS-12's, so I'm picking an ending salary in the middle. The numbers work regardless.)

The question then becomes "How much am I getting paid to continue to deal with 50-hour or more workweeks to meet LEAP/AUO requirements, the headaches of after-hour callouts, undesirable work assignment deadlines, travel on short notice, personal risk, missed birthdays, long commutes to the office, and so on?" The answer might just disappoint you...

Let's assume an 1811 SCE is retiring after 24 years with a High-3 of $130,000. Let's also assume they retire on their 50th birthday, which would be their earliest eligibility in this example:

FERS Annuity: $49,400 ($130,000 x 38%, 1.7% for the first 20 years, 1% for the next 4)

FERS Supplement: $14,400 (a realistic estimate)

Total: $63,800

Less Survivor Benefit: -$4,940 (full 50% death benefit)

Net Retirement: $58,860

Most people stop here. They see $58k and get a sick feeling in their stomach. They are used to seeing a gross of $130k and start freaking out, desperately trying to figure out how they will live taking a 55% pay cut!!! But hold on--they're comparing apples and oranges.

You aren't actually getting to spend every dime of your $130,000 you make now, right? Some of that money is already spoken for. A lot of it goes to Social Security, Medicare, TSP, and FERS Retirement. You will NOT be paying for those things out of your retirement check. I want to make sure everyone understands that. Your retirement check doesn't have TSP taken out, or Social Security tax, or your 1.3% for your FERS retirement (or 4.9% for your poor recent hires--sorry!!)

To compare the retirement salary to the working salary, we have to add those things back in that are being taken out now so that a fair comparison can be made. So let's get started:

Social Security: $8,060. Social Security taxes income at 6.2% $130,000 x 6.2%=$8,060.

Medicare: $1,885. Medicare taxes income at 1.45%

FERS Retirement: $1,690. This is at the lowest 1.3% rate. For those of you hired recently, you pay up to 4.9%.

TSP Contributions: $19,000. This is the maximum limit and what I find many of you are contributing during your final employment years.

Income Taxes: $1,500. Because you'll be making less, you should be PAYING less. This is a conservative amount, estimating what you'll save.

Now, let's add all of this back together to our $58,860 salary and what do we have? $90,995. Or, put another way, 70% of what you were making prior to retirement. Meaning, even if you don't get out of bed, you'll be making the equivalent of 70% of what you were making before you retired. Whew! Feel better, now? I return to my original premise--Find a job making 35% of what you're making now, and you'll be the same as before. In fact, in this example, you'll be 5 percentage points better than you where you were pre-retirement.

I'll end the first part of this three-part series by pointing out a few things:

1. This is without touching your TSP balance. Many people supplement their income with TSP withdrawals. After all, that's what you saved it for. But, I'm using a conservative approach and not including those payments in my numbers.

2. Many SCE's are retiring with more than 24 years of service, especially when considering military time bought back. This will make your FERS annuity percentage even higher.

3. If you are married to another FERS employee, you may not need (or want) to take the FERS Survivor Benefit since your spouse will qualify for FEHB and their own annuity. That adds another 10% back into your retirement check, or $4,940 in this example.

Real-World Example

A GS-13 recently contacted me as I was typing this and shared her actual numbers. She will earn $24,000 less in retirement than she is currently earning while working. Her concern was that she "loses" $24,000 a year, or $2,000 a month. And that is true. I'm not aware of any job that will pay you a full 100% to not show up. But the flip side of this is that she is only working for $24,000 a year, since she'd get everything but that if she retired. (Of course, continuing to work means some other benefits like TSP matching, etc., so there are other factors to consider, but my point is that the salary itself is not tremendously different.)

Stay at home and you make everything you make now except for $24,000. Work 40 hours a week for 52 weeks and you earn an extra $24,000. That's a lot of work for $24,000. In fact, if you do the math, you'll see you're working for $11.54 an hour. Just to put that in perspective: Minimum wage in Washington, DC is $12.50 an hour....

Click links for Part 2 and Part 3.