Ask The Experts: Money Matters

By Mike Miles

Test your retirement financial fitness

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Are you planning to retire soon? If so, you’ll need to figure out whether you’re financially able to make it work in the near and the distant future. Because there are few, if any, truly reliable financial guarantees, this can be a difficult thing to determine.

The essential question is this: “Will I have the resources — usually cash — available when I need it to support my desired standard of living for the rest of my life?” If someone else is depending upon you for all or part of their financial support, your retirement decision will affect them, as well, and they should answer this question before you commit.

If you are relying solely on a CSRS annuity, or even Social Security, to support your living expenses in retirement, your job is fairly easy. Both of these income streams are fully indexed for inflation and guaranteed by the best guarantor there is. The most significant risk you have to consider with these is that the guarantee you’re counting on might fail. While this may seem like a large risk, it is relatively small when compared with the risks associated with other potential income sources, like FERS and private annuities, and withdrawals taken from an invested portfolio. These risks include loss of purchasing power, insolvency, reduction in benefits, and market and interest rate risks. Assigning probabilities to these risks and analyzing their potential effects on your retirement plan is beyond the ready ability of most people who don’t specialize in statistical analysis. So, what can you do?

Start with this basic test. Add up the sum of your guaranteed retirement income streams from such sources as CSRS, FERS, Social Security and other defined benefit pension plans.

Then do some research to see what kind of payout you can expect to receive if you used all of your savings and investments to purchase one or more inflation-adjusted guaranteed fixed immediate annuity contracts.

Make sure that you choose the maximum inflation adjustment rate available when requesting the quote. The Thift Savings Plan website has a calculator that will give you a quote, on the spot. Add this guaranteed annuity income to your other guaranteed income to find your total pretax guaranteed retirement income.

If this is enough to meet your expected cost of living, after deducting an allowance for taxes, then you can probably safely retire.

If not, you should investigate your options further to see if an alternative approach might be workable.

With annuity payouts near historical lows, the invest-and-withdraw option, if managed prudently, will probably support a higher standard of living and produce better results — at least until the payout rates rise significantly.

Here’s a sample test calculation based on three guaranteed income sourses — FERS, Social Security and TSP:

FERS annuity: $30,000

Social Security: $20,000

TSP annuity payout with increasing payments on $200,000: $10,000

Total guaranteed pretax income: $60,000

Less 25 percent allowance for taxes: -$15,000

Total guaranteed after-tax income: $45,000

After-tax cost of living in retirement: $40,000

Test result: Fit to retire.

This test is not conclusive, but it is a good starting point in determining your financial fitness for retirement.

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