When you think of retirement, what comes to mind? This question might prompt various thoughts and goals you have for your life. For some, the first thing that comes to mind is retirement from active duty service. For others, it’s that day when they can stop working completely. Some think of the activities they plan to enjoy in retirement including hobbies, family time, travel, and more. Perhaps you are one of those people who hasn’t even started to think about retirement because it seems so far in the future, while others may have started saving for retirement with their first paycheck.
However, one thing that we know for sure is that retiring takes financial resources. Making a choice TODAY to start or continue saving for your retirement can have a huge impact over your working years, as it helps you reach a point of financial security that allows you the freedom of choice.
How much do you need to retire?
There is one answer to this question that you can count on: “It depends.” One rule of thumb calls for income in retirement of around 70-80% of pre-retirement income, but because everyone has different plans and goals, the amount varies from person to person. Some people aggressively save in their working years, living well below their means, and therefore would need a smaller amount of income to maintain their lifestyle in retirement, perhaps as low as 50-60%. Others may have retirement goals of travel, hobbies, etc,, and therefore want to have more income in retirement to support those plans.
Using free online calculators can help you assess how much you need to retire, and how much to start saving to reach your goals. In the calculator, experimenting with small adjustments will help you understand how your actions today affect your future. For example, saving one to two percent more of your income, or delaying retirement by one to two years, can have a dramatic effect on how much you need to save.
Sources of Retirement Income
Once we have an idea of how much income is needed in retirement, the next step is to determine the sources of that income. While there are virtually unlimited ways to create a future source of income, there are some that are most common.
- Pensions. Those who earn a retirement from military service and/or federal employment will receive a monthly payment based on their years of service and earnings while working. The amount of the payment is based on a known formula, and is paid to the employee monthly for the rest of their life. This is called a defined benefit plan, in which the employer agrees to future payments (the benefit).
There have been several changes over the years to the formula for military retirement, most recently the change to the Blended Retirement System (BRS) in 2018. Using the military retirement calculator is one of the best ways to forecast a military pension. Make sure to select the correct calculator; for most current active duty members, this will be either “BRS” or “High-3” for Legacy retirement members.
There is a different formula for FERS employees and more options that can affect the pension amount. An unofficial estimate of retirement benefits can be viewed by downloading a benefits statement from your employee personal page. Additional civilian resources include the Office of Personnel Management and the Coast Guard Retirement and Benefits Service Center (look for the “Who’s Who list).
- Savings & Investments. Regardless of other sources of retirement incomes, saving and investing for your retirement is one of the best ways to secure your future. The Coast Guard offers the Thrift Savings Plan as a convenient way to defer income for the future. This is called a defined contribution plan, meaning the employer provides a formula for how they will contribute to the plan in addition to the employee’s contributions, and then the participant determines how to invest the funds.
Members in Blended Retirement and civilians can receive automatic and matching contributions to their TSP from the Coast Guard, and should consider contributing at least 5% of their pay in order to receive the full match. Private employers may offer similar plans like 401(k), 403(b), 457 and others.
Apart from employer plans, Individual Retirement Arrangements (IRAs) are a retirement savings option available to employees as well as many non-working spouses. IRA’s can be used in addition to employer plans. One thing in common of all these options is that you will have the opportunity not just to save, but to invest your retirement funds. For more on IRAs and investing basics, check out last month’s article, “Money Matter$: Start Investing Today.”
- Social Security. If you listen to the news, you will know that Social Security is a topic of frequent discussion and speculation. While it’s true that Social Security faces some challenges and modifications in the future, however this does not mean Social Security benefits may disappear forever. The 2020 Trustees Report indicates that Social Security Old-Age and Survivors Insurance will be able to pay full benefits until 2034, after which tax income will provide 76% of scheduled benefits. It’s certainly possible that Congress could take action to address this concern before 2034, and extend the viability of 100% payments well into the future. With some uncertainty about how Social Security benefits may change, the best thing to do is become informed about the options, and create a My Social Security account to view or download your personal report and/or use the Retirement Estimator. Depending on your level of confidence, you can choose to include all, some or none of the proposed SSA benefit as income in your retirement plan.
- Other Sources of Income. Besides these traditional, retirement-specific strategies, there are virtually limitless ways to create streams of income that can support you in the future. Some of these might include real estate investment and rental properties, owning a business that will provide profit into retirement, working part-time or consulting after leaving full-time work, taxable investment accounts, working in the “gig” economy, and more. Every option has its own risks and potential rewards, and may be a better fit for some than for others.
Sample Retirement Calculation
By now, it is clear that planning for retirement involves a few different steps and more than a little number-crunching. Thankfully, there are calculators and resources to help with creating your own plan. This example below will demonstrate how to bring this together.
The example Coastie is Chief Savvy, a 44-year old single individual, who is about to retire from active duty with 24 years of service. They expect to receive annual retirement payments from the Coast Guard of $37,000, and will be working at a civilian job (non-federal) for a salary of $70,000. They hope to retire completely at age 62, in 18 years.
| 1. Calculate the income needed in Retirement. |
Chief Savvy uses a 75% income replacement rate, and applies to their current income of $107,000:
$107,000 x 0.75 =
|
$80,000 |
| 2. Sources of Income |
Military Retirement continues for the rest of Chief’s life. |
-$37,000 |
| |
Social Security. Chief’s Social Security full Social Security Benefit at age 62 is expected to be $1500/month, or $18,000 per year, and they decide to include the full benefit in their plan. |
-$18,000 |
| |
Personal Savings. Chief has approximately $60,000 combined in TSP and an IRA. They used the TSP Payment and Annuity Calculator to determine a Single Life Annuity could provide about $275 per month. |
- $3,300 |
| 3. How much is still needed? |
Subtracting the estimates for future income from Chief’s future needs, the amount remaining is the additional amount they need annually in order to fully fund retirement. |
$21,700 |
Make a Plan
The fictional Chief Savvy has already started their plan by factoring the known sources of income for their retirement, and you can, too. Once there is a known gap in future funding, filling that gap becomes the goal to reach for the time period between now and the desired retirement age. In Chief’s case, they expect to work 18 more years before fully retiring at age 62, and will employ various strategies to close that gap. Often, someone will use a combination of tools to meet their goals. Some specific strategies could include:
Continuing to save in an employer retirement plan and/or IRA to increase the amount of personal savings that can provide income. With 18 years until Chief is age 62, their current balance will continue to grow and will be boosted by regular paycheck contributions.
Reducing the income replacement rate modestly can change the long-term need substantially. For example, if Chief uses a 70% income replacement instead of 75%, they will need almost $5,000 less per year in retirement income. They may find as they transition to civilian life and have increased income, that they can maintain their current standard of living without using their full income.
Extending a retirement date by a year or two, in this case to age 63 or 64 can make a significant difference because the extra two years of saving, rather than using personal savings, will lead to a bigger nest egg at retirement. Social Security benefits will also be larger if Chief defers collecting beyond age 62.
Using a budget to manage spending each month can help Chief balance their current needs with their retirement goals, ensuring they are saving enough.
Don’t forget one of the most critical steps in the plan process: monitoring your progress and making adjustments. At minimum, reviewing your plan every three to five years, can help you make adjustments and ensure you are on target. As you get closer to your planned retirement date, increase the frequency of those reviews. You never know, you might even find that you can retire sooner rather than later.
What’s most important about this scenario, and your situation, is taking the time to make a plan. While it’s easy to postpone planning when daily life is demanding, the value of a plan goes far beyond the financial, and can provide you motivation to reach your goals and peace of mind to know your financial future is secure.
Resources
- For additional help, reach out to your nearest Personal Financial Manager (PFM) located at each Health, Safety, and Work-Life Regional Practice (HSWL-RP.) Connect to any Work-Life office by calling -202-475-5100 or Work-Life Field Offices | Office of Work-Life Programs
- CG SUPRT offers onsite classes, webinars, online tax filing, and telephonic money coaching sessions under their Personal Financial Wellness Program; for more information, visit www.CGSUPRT.com or call 1-855-CG SUPRT (247-8778).
- For additional resources and information for the Personal Financial Management Program, please visit this site: Personal Financial Management Program (PFMP) | Office of Work-Life Programs
About the writer
Rebecca Ligtenberg, AFC®, is the Coast Guard Personal Financial Manager for District 17. A California native, she counts it as one of her luckiest days when she moved to Kodiak, Alaska to work for the Coast Guard. She has been helping military members reach their financial goals since 2015, and enjoys helping every member learn new information to improve their own financial skills. When she’s not helping members with their money questions, she enjoys Alaska’s great outdoors by hiking, beachcombing and watching Kodiak’s world-famous bears – from a safe distance, of course! You can email her or call her at 907-654-5462 or.