Retirement planning - mixing pension and 401(k)/TSP

[AmyRI]

If you have a pension, and are fully vested, how do you account for that when planning for retirement?

I have been trying to get to the traditional benchmarks with my Thrift Savings Plan (federal employee version of 401(k)), as if I do not have a pension when I retire. Following Fidelity, 1x salary at 30, 3x at 40, etc. At this point I have enough service to have a meaningful pension payout in retirement even if I left Federal service today - $20k annually is not insignificant. I realize the more I can save the better, but we have other priorities now so dialing back to saving 10% (with additional 5% employer match on top) is appealing. By conservative estimate of returns, I would miss the 3x by 40 benchmark, only making it to 2.5-2.75x by 40 depending on market returns. That may still be fine in retirement with the pension.

Anyway, if you have both a pension and traditional retirement savings, does the pension affect your contribution amount to the retirement savings?

[simpsongal]

Someone on here once said to multiply the value of your expected pension payout by 25 to approximate its value in your retirement planning.

I'm fellow fed, I used to discount the pension too. When I came into fed employment a lot of the last CSRS full pension folks were retiring so the rest of us felt like scrubs. But now I'm hoping my pension will pay most of our regular living expenses in retirement. A third of your high 3 salary adjusted w/COLAs is pretty significant, esp if you don't have a mortgage, daycare, and other major expenses (ahem...maybe medical).

That said, I do put 10% of my salary in my TSP (they match 5% on top). It's doable and I like deferring the taxes. I was overfunded when I hit 40, so I took a hefty loan for my kitchen reno

[flygirl]

I’m so risk adverse on things I have no control over, like social security and pensions so if I had the funds, I think I’d still contribute to the ROTH or split the difference vs backing way down and counting it all.

[quesyrah]

We had this question recently as well. We found out that through my husband’s employer we could meet with a financial advisor.

One of the things we were having trouble with is figuring out how much the pension would pay out because it’s a complicated formula. DH’s pension formula uses the 5 highest years of earnings.

So the financial advisor suggested that we use the calculation of what we would get on his current salary, which would be $2,300 a month. If he dies I will get half of his payment. In reality the pension will be higher because his salary will go up.

So the guy we met with told us what % to contribute to his 401K to give us the monthly income we are aiming for in retirement including the pension payment. So basically we want $3,500 minimum. So we need the 401k to pay us $1,200 a month.

As it turns out we are not as far behind as we thought.

I hope that makes sense.

[ssmjlm]

I’m a fed and at 42 have 3.4x my salary in TSP right now. I do 16%, plus match and have had that for several years.

I will likely calculate FERS closer to retirement simply because I plan to go as soon as I can, which is 57. Mostly it’s the timeline of trying to live off the pension and then TSP supplementing if needed until I hit the age you have to withdraw.

We’ve agreed that I will not do FERS spousal support, so my pension will be higher. DH is older and it’s not worth the cut. There will be enough cash flow from other places.

[gt7301b]

We are in the fortunate position to both have pensions.  Until the last couple of years I didn't really consider it as part of my retirement savings.  My husband's pension is significantly better than my pension and has a crappy payout if he were to leave early, so I don't see us ever leaving the area.  We have been savings pretty aggressively till this point but we are now at a point where I feel that we can dial back our savings in TSP. 

We went ahead with a significant remodel last year as a result of that reevaluation of our priorities.  My only regret is that we didn't do the remodel sooner.  As time goes on we will focus more on how to best utilize our pension and may by back a couple years for my husband so we can both retire at the same time.  I am confident that we will end up seeing most of the pensions and that it will pay for a significant portion of our retirement spending at least in the early years when we hopefully  don't need medical care.

[ssmjlm]

s/o question

Does anyone worry that reducing TSP would affect taxes?

I know some think that your taxes will only go up, but I’m not 100% that’s an accurate line of thought.

[dragon's breath]

My goal was to be able to take a VERA, if offered. I saved quite a bit in TSP early on (too much if I have to work to MRA), so I cut my contributions way down the last few years, so I could take care of some other financial goals. I do still max my Roth IRA though (have to do backdoor).

Yes, I include the pension in my calculations, because the pension alone will cover all of my bills, so that's pretty significant. However, mid-40s, I have over 7x my income in TSP. Even if I could get a VERA next year, and only get 25% of my pension, no supplement until 57, and no COLA until I turn 63 (because of the stupid way they make you wait for it after you turn 62), that 25% is enough to cover majority of my bills all by itself.

I have one or two more things I want to do before even considering upping my TSP contributions again.

I like to play with a lot of different online calculators, and all say I'll be just fine (better than fine if I have to stay to MRA).

[dragon's breath]

Feb 7, 2024 17:03:23 GMT -5 ssmjlm said:

s/o question

Does anyone worry that reducing TSP would affect taxes?

I know some think that your taxes will only go up, but I’m not 100% that’s an accurate line of thought.

No, at least not right now.

I made the switch to all Roth a couple years ago (TSP and backdoor Roth), am in the 24% tax bracket, and my effective tax rate increased less than 3% (no state taxes).  I'd much rather pay a few thousand more now to avoid making the big RMD tax bomb worse than it already will be (I will have to do a lot of Roth conversions as soon as I retire, and it still won't be enough.  I wish I would have made the move to all Roth many years ago.)

ETA: unless I get a VERA, I am not likely to ever be in a lower tax bracket, and even with the VERA I'll need to do enough Roth conversions to keep it from going up that it probably won't go down.

[Susie]

MH is vested in a state retirement system pension that will be significant.  He also maxes a 457(b).  I max a 401(k), plus a little beyond the usual 'max' because I can put in profit sharing as well.

I'm sure I should talk to a financial planner about whether we should be doing more.  Until the last couple years, it has always felt like we were doing the most we could swing, but now that we might be able to do a little more, maybe we should.

[1yeartogo]

Can someone explain the FERS to me. I understand it to be ~1% of high 3, but I’m seeing people in the comments saying they could have that meet all their expenses so I’m confused. For most people doesn’t this result in only a grand or two?

[dragon's breath]

Feb 8, 2024 15:43:25 GMT -5 1yeartogo said:

Can someone explain the FERS to me. I understand it to be ~1% of high 3, but I’m seeing people in the comments saying they could have that meet all their expenses so I’m confused. For most people doesn’t this result in only a grand or two?

It varies a bit by age and years of service (I'll have 35 years if I work to MRA).  But, here is a quick rundown.

FERS pension formula = 1% * years of service * high-3 average.

If you retire at 62, or later, with at least 20 years of service, the multiplier changes from 1% to 1.1%.

If you retire with MRA + 30, or 60 + 20, there is also the FERS annuity supplement.  This is roughly estimated as "expected SS at age 62 * years of qualifying FERS service / 40".  Bought-back military time will make you eligible for the supplement, but will not be included in the calculation itself.

Some examples, assume all have a high-3 of $100k, and expected SS at age 62 is $2000/month, and will retire at full retirement eligibility (so no deferred retirement or MRA + 10).

Mary has 20 years of service and will retire at age 60.  Her pension will be $20k, and her approximate supplement will be $12k.  She would receive $32k until age 62, when the supplement drops.

Bob has 20 years of service, and will retire at 62. His pension would be $22k, no supplement.

Sue has 35 years of service at MRA.  Her pension will be $35k, with the supplement being about $21k.  This would be $56k until age 62, when supplement drops.

Carrie has 25 years of fed service, and 10 years of bought-back military time, and will retire at MRA.  Her pension would be $35k, with the supplement being about $15k. This would be about $50k until age 62, when supplement drops. 

Jim has 5 years of service and retires at 62. His pension would be $5k, no supplement.

If someone defers retirement, they still get the same formula 1% formula as the others, but they don't get to keep FEHB in retirement.  When they can start the pension depends on years of service and if they want to take an age reduction or not.  Deferred is not eligible for the 1.1% multiplier, even if they had over 20 years and waited until 62 to collect (so they should start at 60, since they had 20 years, no age reduction).

Someone with MRA + 10 has to choose between an immediate, but reduced pension (5% reduction for every year under age 62), or postponed pension to reduce or eliminate the age reduction (but no FEHB until pension is started).

All the above assumes "regular FERS", no special category, disability, VERA (aka "early out"), etc.

[1yeartogo]

Feb 8, 2024 17:45:35 GMT -5 dragon's breath said:

Feb 8, 2024 15:43:25 GMT -5 1yeartogo said:

Can someone explain the FERS to me. I understand it to be ~1% of high 3, but I’m seeing people in the comments saying they could have that meet all their expenses so I’m confused. For most people doesn’t this result in only a grand or two?

It varies a bit by age and years of service (I'll have 35 years if I work to MRA).  But, here is a quick rundown.

FERS pension formula = 1% * years of service * high-3 average.

If you retire at 62, or later, with at least 20 years of service, the multiplier changes from 1% to 1.1%.

If you retire with MRA + 30, or 60 + 20, there is also the FERS annuity supplement.  This is roughly estimated as "expected SS at age 62 * years of qualifying FERS service / 40".  Bought-back military time will make you eligible for the supplement, but will not be included in the calculation itself.

Some examples, assume all have a high-3 of $100k, and expected SS at age 62 is $2000/month, and will retire at full retirement eligibility (so no deferred retirement or MRA + 10).

Mary has 20 years of service and will retire at age 60.  Her pension will be $20k, and her approximate supplement will be $12k.  She would receive $32k until age 62, when the supplement drops.

Bob has 20 years of service, and will retire at 62. His pension would be $22k, no supplement.

Sue has 35 years of service at MRA.  Her pension will be $35k, with the supplement being about $21k.  This would be $56k until age 62, when supplement drops.

Carrie has 25 years of fed service, and 10 years of bought-back military time, and will retire at MRA.  Her pension would be $35k, with the supplement being about $15k. This would be about $50k until age 62, when supplement drops. 

Jim has 5 years of service and retires at 62. His pension would be $5k, no supplement.

If someone defers retirement, they still get the same formula 1% formula as the others, but they don't get to keep FEHB in retirement.  When they can start the pension depends on years of service and if they want to take an age reduction or not.  Deferred is not eligible for the 1.1% multiplier, even if they had over 20 years and waited until 62 to collect (so they should start at 60, since they had 20 years, no age reduction).

Someone with MRA + 10 has to choose between an immediate, but reduced pension (5% reduction for every year under age 62), or postponed pension to reduce or eliminate the age reduction (but no FEHB until pension is started).

All the above assumes "regular FERS", no special category, disability, VERA (aka "early out"), etc.

Thank you, these pension amounts are totaled, correct. Not per year so I still don’t understand people saying they could live off it. In your example saying the person at 60 couldn’t keep FEHB, why is that, especially when Medicare is not available until much past 60?

[dragon's breath]

Feb 8, 2024 19:27:13 GMT -5 1yeartogo said:

Feb 8, 2024 17:45:35 GMT -5 dragon's breath said:

It varies a bit by age and years of service (I'll have 35 years if I work to MRA).  But, here is a quick rundown.

FERS pension formula = 1% * years of service * high-3 average.

If you retire at 62, or later, with at least 20 years of service, the multiplier changes from 1% to 1.1%.

If you retire with MRA + 30, or 60 + 20, there is also the FERS annuity supplement.  This is roughly estimated as "expected SS at age 62 * years of qualifying FERS service / 40".  Bought-back military time will make you eligible for the supplement, but will not be included in the calculation itself.

Some examples, assume all have a high-3 of $100k, and expected SS at age 62 is $2000/month, and will retire at full retirement eligibility (so no deferred retirement or MRA + 10).

Mary has 20 years of service and will retire at age 60.  Her pension will be $20k, and her approximate supplement will be $12k.  She would receive $32k until age 62, when the supplement drops.

Bob has 20 years of service, and will retire at 62. His pension would be $22k, no supplement.

Sue has 35 years of service at MRA.  Her pension will be $35k, with the supplement being about $21k.  This would be $56k until age 62, when supplement drops.

Carrie has 25 years of fed service, and 10 years of bought-back military time, and will retire at MRA.  Her pension would be $35k, with the supplement being about $15k. This would be about $50k until age 62, when supplement drops. 

Jim has 5 years of service and retires at 62. His pension would be $5k, no supplement.

If someone defers retirement, they still get the same formula 1% formula as the others, but they don't get to keep FEHB in retirement.  When they can start the pension depends on years of service and if they want to take an age reduction or not.  Deferred is not eligible for the 1.1% multiplier, even if they had over 20 years and waited until 62 to collect (so they should start at 60, since they had 20 years, no age reduction).

Someone with MRA + 10 has to choose between an immediate, but reduced pension (5% reduction for every year under age 62), or postponed pension to reduce or eliminate the age reduction (but no FEHB until pension is started).

All the above assumes "regular FERS", no special category, disability, VERA (aka "early out"), etc.

Thank you, these pension amounts are totaled, correct. Not per year so I still don’t understand people saying they could live off it. In your example saying the person at 60 couldn’t keep FEHB, why is that, especially when Medicare is not available until much past 60?

"Thank you, these pension amounts are totaled, correct. Not per year..."

Yes, they are per year.  Each example, where I totaled the pension, is an annual pension.  These are not "lump sum" values.  After reaching 62, you will also get a "diet COLA" on the pension."

"the person at 60 couldn’t keep FEHB, why is that"

This person was an example of a deferred pension (leaving before you hit MRA).  You cannot keep FEHB in retirement if you defer the pension.  It's one of the penalties for not sticking around long enough for full retirement benefits.