From Dream to Reality

How to Define and Design Your Federal Retirement

When you get in your car, pull out of your driveway, and leave your neighborhood, how often do you have your destination in mind, a goal to end up somewhere specific? You might adjust the route for traffic but it’s rare that you actually start your car without a pretty good idea of where you want to be when you shut it back off, right?

That’s because knowing your destination before committing to a path is the only way to accurately decide on the best route to get there! Is it a weekday or weekend? Is it rush hour? Are the back roads faster? Are there stops you want to make along the way? Without a clear idea of where you want to arrive it is hard to determine the best way to go about getting there.

Preparing for retirement is very similar in that it is quite difficult to effectively begin planningwhen we do not have an idea of what our dream retirement looks like.

Does it include a travel budget? Does it include leaving a legacy to stretch for generations to come or do we want to spend our hard earned money while we can still enjoy it? Does your dream retirement include being glued to the markets every day or do you simply want to know you wont outlive your money?

What does your dream retirement cost?

Start with what’s most important to you, the expenses that absolutely need to stay in the budget, then add the expenses that would round out your dream retirement by order of importance. It is a personal decision in which everyone has their own definition of what a reasonable expense or budget looks like.

For many of us though, a big component of our dream retirement is simply having the peace of mind that we can preserve our current lifestyles without the pressure of watching the markets every day or trading 40 hours a week for a paycheck… no matter how long we live!

Try using this complimentary Federal Retirement Budget Calculator to track a month’s spending so that you can begin gauging what your current lifestyle actually costs and why. People don’t ask “Why?” their budget is the way it is, but reflect on which expenses would be needs and which ones would be wants in retirement. Joe Biden explained it by saying, “Don’t tell me what you value. Show me your budget and I’ll tell you what you value”.

When would your dream retirement start?

Say it with me now, “the sooner the better!” Amen! But remember its not the age at which you retire, but the income at which you retire that determines your satisfaction long term. Marking a dream retirement date on your calendar sets a shot clock to help you hold yourself accountable but you need to do more than just “circle a date”, you need to truly take ownership of it in order to make it happen!

A Dream Written Down With a Date Becomes A Goal

Once we identify our retirement income need and establish a goal for when we want to step out the door, then we can then begin working backwards to assess how close your current approach comes to achieving those goals we just established.

Are we on track? Are we taking the most efficient path? Are we aware of whether our route has additional road hazards (market risks, insurance risks, inflation risks) that perhaps alternative approaches do not?

If the main goal for your nest egg is to sustainably continue your current lifestyle into your golden years then we need to know how much of your dream retirement is currently funded by the combination of our Social Security benefit and your FERS/CSRS pension incomes. Whether you forecast your pension by hand, use these online resources, or request a Retirement Income Forecast from WalkerCPG, it is critical that you accurately project these numbers in order to see how much of your lifestyle will need to be funded by your own retirement savings efforts.

A Goal Broken Down Into Steps Becomes A Plan

FERS employees know the infamous third leg of the “FERS 3 Legged Stool”. It is not until we compute the income from the first two legs that we can gauge our nest egg’s ability to fund the third leg, the remaining gap in our annual retirement income.

We don’t have the space in this article to review all of the approaches to projecting spend down strategies to gauge when your assets would run out but let me warn you that the once popular “4% Rule” is now outdated.

While each federal employee’s retirement is unique, at its core the federal retirement recipe is very similar throughout the country – we are all just cooking with different ingredients. There is no single approach that works for everyone, but at the most widely applicable level, federal retirements come down to properly balancing 4 critically important “buckets”. Each bucket has a specific purpose which helps distinguish the risk tolerance & time horizon for the assets within that particular bucket so we can identify which strategies are appropriate for that bucket to employ.

Identifying the ideal mix for you depends on many factors. So while the ingredients we use to fund our buckets may be very different, a successful recipe boils down to coordinating how your ingredients get appropriated in to each of the following buckets (or categories):

§  A reserve bucket of safe liquid assets, like cash, that can be accessed quickly in an emergency regardless of whether it is a bull or bear market

§  A lifestyle bucket(s) that consistently prints “retirement paychecks” to insure sufficient income to preserve your lifestyle (regardless of market returns or how long you live)

§  A growth bucket(s) with a longer investment horizon seeking growth to offset the erosive effects of inflation and to provide the “retirement playchecks” for your bucket list trips etc

§  A tax-favored bucket(s) to grow in case federal income tax rates increase to pay off pay down our $20 trillion dollar debt (remember all 3 legs of your FERS stool are taxable)

o    This bucket is also the most tax-efficient non-insurance option to leave as a legacy

The next step is identifying the personal actions that will help you improve your current plan.

For some, a different approach to growing your assets may be appropriate, for others, perhaps saving on current expenditures, such as the FEGLI or FLTCIP, in order to put more money towards retirement would make the biggest difference.

Unnecessary expenses can be found both in your monthly budget and also in your retirement investment strategies (think fees), so try to identify money you are already spending that you can redirect or reinvest towards your retirement nest egg. This is a great way to improve your retirement without going back to school for a finance degree but learning about the TSP is still critical – don’t just eliminate your daily Starbucks trip and expect everything to take care of itself!

A Plan Backed By Action Makes Dreams Come True

How you apply the steps laid out in this conceptual framework is where the rubber really meets the road. Abraham Lincoln once said, “The best way to predict the future is to create it.” Create yours by backing your new plan with action!

There is one universal investment common to every single informed retiree who has ever successfully built enough wealth to last beyond funding just their dream retirement. Without fail, every single self-made, stress-free, legacy-leaving federal retiree has had one specific investment in common. That one investment that each of them has made, which resulted in their abundant success, is a continued investment in informing themselves!

Knowledge is power! Invest in yours by learning about the TSP funds, the importance of Roth options, and the financial tools appropriate for each of the allocation buckets we outlined earlier. Invest in your self-awareness by creating a budget and asking what your future self would say to your current-self about your spending. Most importantly invest the time to interview financial coaches until you find one whom you trust to understand your goals and help you develop a comprehensive plan to achieve them.

Remember, we were all born uninformed, an investment in yourself is the only investment that will ever guarantee you don’t retire that way!

Tom Walker