Though it’s true you may no longer be spending money on certain things once you’ve retired from your federal career, you can’t afford to underestimate any financial aspect of your retirement. Yet, more often than not, pre-retirees continue to make the same mistakes. Here are the top three.
Mistake #1: Underestimating Your Living Expenses In Retirement
Though a common rule of thumb is that you’ll only need 80% of your current income to cover all of your retirement expenses, following this advice might be a financial risk. When inflation spikes, it’s much harder on retirees who have to cover expenses like the rising cost of prescriptions and healthcare services. More often than not, your expenses in retirement will be around the same as they are now. Then again, as you age, you’ll have other expenses like paying for services you’re no longer able to do yourself: lawn care, grocery shopping, home maintenance, and home repairs.
Mistake #2: Underestimating Your Income Taxes In Retirement
Pre-retirees may be surprised to learn that as much as 90% of their FERS annuity (pension) is subject to income taxes. And, when your combined income in a given year exceeds thresholds established by the IRS, 50% to 85% of your Social Security benefit is taxable as income. Add in taxes you’ll owe on distributions from your traditional TSP balance, and you may find yourself withdrawing more than you planned to pay Uncle Sam. Some call it the retirement “Tax Bomb” because far too many federal employees underestimate how much their benefits can be taxed as regular income.
“Without an accurate estimate of what you’ll need to live comfortably over a 20-to-30-year retirement, you may end up realizing every American’s biggest fear: outliving your money.”
Mistake #3: Underestimating Your Years In Retirement
The Stanford Center on Longevity (SCL) reveals that longevity data used for retirement planning purposes, by both individuals and the government, regularly underestimates life expectancy. Think about it, there’s a big difference in the amount of retirement income it will take to live comfortably during a 20-year retirement compared to a retirement that runs five or 10 years longer than you’ve planned. It’s simple, really. Living longer costs more money. And don’t overlook the fact that the out-of-pocket cost of long-term care in a nursing home becomes more likely as you age. That’s why longevity is considered a bigger risk to your retirement than inflation or stock market volatility.
Without an accurate estimate of what you’ll need to live comfortably over a 20-to-30-year retirement, you may end up realizing every American’s biggest fear: outliving your money. To learn more, connect with an FRC® trained advisor.
