Consider retirement when comparing retirement savings suggestions

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John Grobe

How much money do you need to save for your retirement? If you follow financial websites, blogs, and publications, I bet you read an article on this topic at least once a month. Well, here’s another one!

• A recent Schwab® survey indicates that, on average, workers believe they will need to save $1.7 million for retirement.

• Fidelity® recommends that you save 10 times your income by age 67.

• CNBC® suggests that you take 80% of your current (or expected) salary, subtract the expected permanent income (eg FERS, Social Security, etc.) and multiply the result by 25.

How do these three suggestions compare?

In the comparisons below, I have assumed that a retiree would be able to maintain their pre-retirement lifestyle on 80% of their final salary and would follow a withdrawal rate of 4% (adjusted annually for the inflation) of his savings. These percentages are often used by financial professionals as guidelines, “rules” if you will, for planning and managing retirement withdrawals. We will first examine the recommendations of Fidelity® and CNBC® and later the beliefs of participants in the Schwab® survey and use as an example a person whose final salary was $85,000.

If the individual followed Fidelity®’s suggestion, they would have $850,000 at retirement. At a withdrawal rate of 4%, this would translate to an annual income of $34,000. The “80% rule” would require a post-retirement income of $68,000, leaving an annual shortfall of $34,000. It’s likely that a retired federal employee who made $85,000 a year would get more than that amount from his FERS pension and Social Security (I estimate he’d get close to $40,000 from both sources) , so it looks like Fidelity’s® suggestion would lead you to set aside a little more than necessary.

CNBC®’s calculation is a little different. Again, our goal is $68,000 per year. If the federal retiree receives $40,000 combined between FERS and Social Security, the shortfall is $28,000 per year, which, multiplied by 25, gives a savings goal of $700,000.

Those who responded to the Schwab’s® survey should not rely on any Social Security or pension income or, if they did rely on either, they should aim for a higher annual income. $1.7 million would result in $68,000 of their withdrawals alone if they followed the 4% rule.

Be aware that the examples above assumed a full career (approximately 30 years) federal retiree, those with less time in federal service would receive less of their FERS pension.

What are the takeaways from the above results?

• It’s good that retired Feds have both Social Security and an FERS pension

• We need to put a lot of money aside in our savings plan to supplement our other sources of retirement income if we are to reach the 80% goal suggested by financial professionals.

• Many articles on retirement savings are written for those who will not have a pension and will depend on Social Security and their savings.

• If we start early, we have a good chance of reaching our retirement goals.

When is the best time to start putting money aside for retirement? When you are hired.

When is the next best time? Today!

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