Retirement headlines often focus on one big number.
You may read that you need $1 million, $1.5 million, or even $2 million before you can afford to retire. These numbers may be useful as general examples, but they do not tell you whether your retirement plan will work.
The amount you may need depends on several personal factors:
- Your expected retirement spending
- Your FERS pension
- Your Social Security benefit
- Your TSP and other savings
- Your retirement age
- Your health care costs
- Your tax situation
- The lifestyle you want in retirement
The real question is not simply, “How much money should I have?”
A more useful question may be:
“How much income will I need, and where will that income come from?”
Your Retirement Plan Should Be Designed Around You
FERS retirement income may come from three primary sources: the FERS Basic Benefit, Social Security, and the Thrift Savings Plan. Each source has different eligibility, taxation, and withdrawal rules.
That means two federal employees with the same TSP balance could have very different retirement outcomes.
One employee may:
- Have no mortgage
- Receive a larger FERS pension
- Need less monthly income
- Have lower health care expenses
- Plan to remain in a lower-cost area
Another employee may:
- Still have housing payments
- Support family members
- Travel frequently
- Carry additional debt
- Need more money for medical care
- Retire before Social Security begins
The same retirement savings target would not necessarily work for both people.
A retirement strategy should be based on your income needs, benefits, goals, and financial circumstances—not a number taken from a headline.
Start With a Spending Plan, Not a Guess
Before deciding whether you are financially prepared to retire, you need to understand how much you currently spend.
This is not about judging every cup of coffee or creating a restrictive budget. It is about developing an honest picture of your lifestyle.
Start by reviewing what you spend on:
- Housing
- Food
- Transportation
- Insurance
- Health care
- Travel
- Entertainment
- Gifts
- Subscriptions
- Debt payments
- Family support
- Everyday purchases
Bank and credit card statements can help, but the goal is to understand your normal spending habits—not simply collect numbers in a spreadsheet.
Consider tracking at least several months of expenses. Annual or irregular costs, such as property taxes, home repairs, vacations, insurance premiums, and holiday spending, should also be included.
Create Two Versions of Your Spending Plan
One useful exercise is to create two spending estimates.
- Your Current Lifestyle Spending
This estimate reflects what it costs to maintain your current lifestyle.
Do not assume every expense will disappear when you retire. Although commuting costs may decrease, other expenses may increase. You may travel more, spend more time on hobbies, help family members, or face higher medical costs.
- Your Essential Spending
This is the amount you would need to cover basic obligations if your household had to reduce spending.
It may include:
- Housing
- Utilities
- Food
- Insurance
- Health care
- Transportation
- Minimum debt payments
Your realistic retirement spending target may fall somewhere between your current lifestyle and your essential spending level.
This exercise can help you separate expenses you must pay from expenses you choose to pay.
Compare Spending With Retirement Income
Once you estimate your monthly spending, compare it with your expected retirement income.
For example, suppose you expect to spend $8,000 per month in retirement, but your FERS pension and Social Security are projected to provide $5,500 per month before taxes.
You may need to determine how the remaining $2,500 will be funded.
Potential sources could include:
- TSP withdrawals
- IRA withdrawals
- Cash savings
- Part-time work
- Other pensions
- Rental or business income
This does not automatically mean you are unprepared. It means you have identified the gap that your retirement strategy needs to address.
You should also consider whether the income figures are shown before or after taxes. A projected gross pension is not the same as the amount that will reach your bank account.
Do Not Ignore Inflation
Inflation represents increases in the prices consumers pay for goods and services. As prices rise, the purchasing power of each dollar declines.
A retirement spending plan based only on today’s prices may underestimate what the same lifestyle could cost 10, 20, or 30 years from now.
Federal retirees may receive cost-of-living adjustments when eligible, but those adjustments may not perfectly match an individual household’s actual expenses. Your personal experience with inflation will depend on where your money goes.
For example, a household that spends more than average on health care, housing, or travel may experience different cost increases than those shown in a national inflation average.
Your plan should therefore consider how both expenses and income may change over time.
Taxes Can Change Your Retirement Cash Flow
Inflation is largely outside your control. Taxes may offer more planning opportunities, although future tax laws and individual results cannot be predicted.
A portion of a FERS annuity is generally taxable, while another portion may represent a tax-free recovery of the employee’s retirement contributions.
Traditional TSP distributions are generally subject to federal income taxes. Roth TSP distributions may receive different treatment when the requirements for a qualified distribution are met. TSP withdrawal choices may also affect tax withholding and potential early-distribution penalties.
Social Security benefits may also be taxable depending on filing status and other household income.
A retirement tax strategy may review questions such as:
- Which accounts should provide income first?
- How much should be withdrawn each year?
- Should traditional or Roth money be used?
- How could withdrawals affect taxable income?
- Is enough federal and state tax being withheld?
- Could large withdrawals increase other income-based costs?
- Are there opportunities to manage taxes before required distributions begin?
These decisions depend on individual circumstances. Tax strategies should be reviewed with a qualified tax professional.
Begin Planning Several Years Before Retirement
The U.S. Office of Personnel Management encourages federal employees to begin preparing several years before their expected retirement date. OPM specifically provides planning guidance for employees who are within five years of retirement.
Starting early gives you more time to:
- Review your service history
- Request a retirement estimate
- Confirm retirement eligibility
- Review FEHB and FEGLI continuation requirements
- Estimate Social Security
- Evaluate your TSP
- Reduce debt
- Test your retirement spending plan
- Review taxes
- Adjust savings contributions
- Prepare for the timing of retirement income
Waiting until your retirement paperwork is ready to be submitted may limit the choices available to you.
Consider Testing Your Retirement Income
Before retiring, consider practicing living on your estimated retirement income.
For example, if your projected retirement income will be lower than your current take-home pay, direct the difference into savings for several months.
This may help you answer two important questions:
- Can your household comfortably live on the projected amount?
- Are there expenses missing from your estimate?
A test period may also help you identify spending changes before they become necessary.
The Bottom Line
There is no single retirement savings number that applies to every federal employee.
A large TSP balance does not automatically create a successful retirement. A smaller balance does not automatically mean retirement is impossible.
What matters is how your available resources work together.
Your retirement strategy should connect:
- Your expected spending
- Your FERS pension
- Your Social Security
- Your TSP and other assets
- Inflation
- Taxes
- Health care
- Survivor needs
- Your personal retirement goals
At the end of the day, this is your money and your future.
Rather than building your retirement around a national average, consider building a strategy around the life you actually want to live.
Action Items for Federal Employees
- Track your current spending for several months.
- Create both a normal and essential spending estimate.
- Request an updated FERS retirement estimate.
- Review your Social Security statement.
- Review your TSP balance and withdrawal options.
- Estimate taxes and insurance deductions.
- Compare projected income with projected spending.
- Revisit the plan regularly as retirement approaches.
ABOUT THE AUTHOR
Micah Shilanski, Managing Partner, Wealth Advisor, is a distinguished financial planner known for his deep commitment to providing exceptional advisory services to his clients. As the founder of Plan Your Federal Retirement, Micah has dedicated his career to helping federal employees understand and optimize their benefits to help ensure a secure and prosperous retirement. His experience is widely recognized in the industry, making him a sought-after speaker and educator on financial planning and retirement strategies.
Micah’s approach is client-centered, focusing on creating personalized strategies that address each individual’s unique needs. His work emphasizes the importance of comprehensive planning, incorporating aspects of tax strategy, investment management, and risk assessment to guide clients toward achieving their financial goals.Floyd Shilanski (00:00.704)
I fortunately is here at Plan Your Federal Retirement. Over the last six, seven years, three years, six months, I can’t remember, you know, I got CRS, I’m getting a bowl over. But one of the things I look at as I’ve been preaching about design in your retirement plan for you. One of the things that has recently happened is that the Wall Street Journal History Writing articles that say design your retirement for you. Congratulations to the journal. It’s about time.
I get very frustrated when I read the articles and I see the articles and the YouTubes and they talk about you need one point four million dollars, you need two million dollars, you can’t do this and you can’t do that. All logical, which I agree. But what I really like to see is planning your retirement for you. What’s your strategy? Do you have a retirement strategy? Do you have a retirement tax strategy? All right. Those are the huge things we gotta worry about. Why? Number one, there’s two things that rob you, or there could be three.
There’s two things that I think that will obviously when you get into retirement mode. Number one is inflation, right? And we hear today that it’s inflation’s four point five or five point four percent. And every time inflationary dollar goes up, that takes away our spending power. We can’t do a whole lot about that. Right? The second thing is taxation. And you do have an opportunity to do something like that. And it’s called a strategy. So we like to see a five year strategy on taxation one before we get ready to retire. But let’s rather that back just a little bit.
If you’re three, four, five years away from retirement or just getting started, now’s the best time to start putting money away for the future. If you’re five years out from retirement, what I think you should do is give me or develop a spending plan, not a budget. We justify budgets, all right, but a spending plan. And the first spending plan I like to see is exactly what you’re doing today. Not what you’ll do in the future, but what you’re doing today. From the Starbucks to the copy to running ear to the gifts, all those things the way you spend.
Now, one of the frustrating things that I get when I meet with new people that want to come visit with me is when I ask them how much does it cost to spend? What are they spending on a monthly basis? They typically will reach down, pull up their phone, pull up their bank, say and start telling them you’re the credit card statement. And I like to put it down. If they don’t do that, they bring their spreadsheets. I’d like to turn those upside down and say, tell me. Because if we don’t have it ingrained. We don’t really know. That’s my opinion. I could be proven wrong by all means.
Floyd Shilanski (02:22.606)
So the first thing we want to do is look at your spending plan as it is today. The next one I want to spend the plan that is in an emergency. crap, we both lost our jobs. We don’t know what we’re going to do. The world’s going to Hades. What do we have to have to survive? Someplace between the two is that magic number. Let’s solve for that first. All right. And the reality is if you’re spending $10,000 a month and your income goes down to $4,000 a month, you’re still going to spend that $10,000.
So the sooner we get started adjusting and finding out with the strategy, how you’re going to fill the gap between those two is extremely important. Now, you can do it yourself by all means, but sometimes you need a third party. Sometimes you need that disinterested individual that can say, What are you doing now? How come you’re doing that? Let’s consider this. Have you considered this or that? And that’s very, very, very important. At the end of the day, it’s your money. At the end of the day, it’s your future. At the end of the day, what you have left is what you don’t spend.
Okay. So on Foy, if you haven’t done these things right, if you don’t have a good retirement strategy, you’re looking to develop one, log on to plan your federal retirement and ask to speak to one of them wanna. If you don’t have a future tax strategy for when you retire, log on to Planning Federal Retirement and talk to one of them. I’m Floyd. Until next time, happy planning.
The content in Planner Federal Retirement is for general informational purposes only and should not be considered individualized advice. Investing involves risk, including possible loss of principal, and past performance does not guarantee future results. Guests are not affiliated with CWM LLC Investment Advisory Services offered through CWM LLC, an SEC Registered Investment Advisor. Planar Federal Retirement is not affiliated with the federal government.
