(Guest Post! From PartnersInFire.com)
Hi Everyone! Today I’m excited to host my first guest post written by Melanie who blogs at PartnersInFire.com. Melanie is a fellow federal employee who is pursing financial independence. You can read her financial posts here! She also has a podcast called, “My Boyfriend Sucks With Money” that you can check out here. Melanie wrote a case study on the deferred retirement she is planning to take in a couple years for my series of posts on early retirement for federal employees. Check it out!!
Working for the government has some amazing perks. One of the best perks, in my opinion, is the Federal Employee Retirement Systems, or FERS as it’s called. I’m sure my amazing host, Gov Fi, has tons of posts outlining the different aspects of FERS, so that’s not what I’m here to talk about. I’m here to talk about why I’m choosing to take a deferred retirement benefit.
Deferred Retirement Benefit
Taking a deferred retirement means that I won’t lose what I’ve already put in, but I won’t be eligible for any “bonus” benefits, such as healthcare options. I will get a full pension (based on the amount of years I worked and my top salary) when I reach full retirement age.
Why I’m planning on taking a deferred retirement
Because I’ve been with the government for so long already, I have three options when it comes to retirement. I can stick with the government for another 30 years (which sound miserable), I can cash out (which comes with its own set of risks and problems), or I can take a deferred retirement.
I’m choosing the deferred retirement option because my main goal is to not be in poverty when I’m a senior. My retirement planning is a three-legged stool which includes a thrift savings plan, my pension, and social security. All three have different levels of risk and rewards, which is why I want to keep them separate. Diversification for the win!
Thrift Savings Plan
The first leg is my thrift savings plan. I have a pretty good chunk of change invested already, and even if I don’t invest another dime, I will have over 700K by the time I’m 62 (assuming a 7% year over year growth rate). That means I’ll be able to withdraw about $2300 per month, which is more than enough to pay for all of my current expenses.
I’m not planning on not investing another dime though. I’m investing an addition six thousand per year, and I’m getting an employee match on top of that. The government matches you dollar for dollar for the first 3% that you put in, and fifty cents per dollar for the next 2%. It also puts an additional 1% in no matter what (so even people who opt to not contribute for some reason get that 1%). In total, the government matches 5% of my pay, so they are putting an additional 4800 or so per year into my TSP. That means I’m contributing a little over ten-grand extra per year for every year that I continue working.
The thrift savings plan does have a vesting requirement. You have to work for the government for three years in order to keep any match that they provide. I’ve worked for the government for much, much longer than three years, so I don’t have to worry about being vested.
Unfortunately, the market is insane, and there is no guarantee that I will get the 7% per year or that there won’t be bad years when I need it the most. Which brings me to leg number two – the much safer pension. My goal is to receive a pension of 1Kper month, which will help ensure I beat inflation when the market is stable, and give me a cushion for the years when it is not.
Let’s do some fun math to see if I’m going to achieve my goal of 1K per month! I’m going to use estimates and rounded numbers here, so as not to disclose my exact income or GS level (though I’m sure some of you sleuths will probably be able to figure it out!).
The amount of your pension is based on the average salary of your top three years and your number of years in service. You need to multiple these two numbers by .01 in order to determine your yearly benefit. My average salary for my top three years is about $97000, and I’ve currently worked for the government for 12 years. So, to find out what my pension would be if I retired now, we would multiply:
97,000 x 12 x .01 = 11,640
That would net me about $970 per month in pension benefits, which is a tad bit shy of my goal. It’s a good thing I’m not retiring today! I’m actually not planning on quitting my job for another two years, so let’s see where that gets me.
97,000 x 14 x .01 = 13,580
Waiting that extra two years would net me $1130 per month in pension benefits! Not too shabby for two extra years I was planning on working anyway.
I do have the option to cash my pension out if I leave the government before my minimum retirement age, but I don’t want to do that. I’d prefer to take the deferred retirement benefit. I already have a major leg of my retirement plan invested, and I want diversity. The pension is a guaranteed, stable 1K per month that won’t change with the market.
Of course, I realize that crazy things can happen – nothing is guaranteed. But I’m making my plan based on things that are likely to happen. I doubt that the government will collapse in the next 30 years (and if it does, we all have way bigger problems than losing a pension!) and the federal government’s pension system is pretty solvent at the moment, so there’s not a huge risk of it getting destroyed. That risk is always present though, which is why my pension isn’t my only leg.
The third leg is social security. I know there’s a lot of fear mongering about social security disappearing, but I don’t think the situation is a dire as they say. I may not get the full benefit, but I’m sure I’ll get something. According to this calculator, if I stop working in two years, at age 62 I’ll be able to collect $1155 per month in social security.
This assumes that I will do absolutely nothing when I quit my job though, and that’s not going to be the case. I do plan on working in some capacity. Perhaps I will work part time at a job I love, or perhaps my blog will actually take off and start earning me real money. But either way, it’s nice to know that even if I don’t do anything, I won’t be destitute when I’m older.
Total retirement income with a Deferred Retirement
If everything goes according to plan, I’ll make $4,585 per month in retirement income from these three legs. That’s not too shabby for quitting the big job before 40! I just have to figure out how to make it from 40 to 62 – but that’s a different part of the journey.
Other retirement Income
These three legs are just the things that I am confident that I will have. I’m not taking any side hustles, other passive income (rental properties, non-retirement investments, etc.), or part time jobs into consideration. I’m like to be busy, so I’m sure I will be up to something!
I know that 30 years is a long time from now, and nothing ever goes according to plan, but I’m not going to live my life in fear. I’m not going to be miserable for the next 30 years because something might go wrong with one of these legs. I’ll do my best to plan for the future (and I think I have!) but I’m also going to live my life my way now. I think that’s the best that any of us can do.