As a FERS participant, you can retire relatively young with an immediate annuity (pension) when you meet the years-of-service requirements. The challenge is having enough income to cover all of your expenses for the rest of your life. When you have a strategic cash flow plan, you can rest assured you’ll never outlive your money.
How To Estimate Your Cash Flow In Retirement
First, calculate the retirement income you’ll receive from your FERS annuity (pension), plus Social Security and your Thrift Savings Plan (TSP) distributions. Also include any monthly profit received from rental properties or other investments.
Next, estimate your essential monthly expenses: mortgage payments or rent, household utilities, car payments/transportation, healthcare premiums and out-of-pocket medical costs. Then add food, personal care products, laundry supplies, home maintenance and pet care expenses. Keep in mind that the majority of these monthly expenses will rise over time due to inflation. And don’t forget to add in taxes you’ll owe on your retirement income.
If you do the math and have enough cash left over for dining out, entertainment and travel, good news – you have positive cash flow. If it looks like your retirement income will fall short, you’ll have a negative cash flow which is considered a retirement income gap.
“In 2024, the Thrift Savings Plan (TSP) contribution limit has been increased to $23,000 while the Catch-Up Contribution limit is $7,500.”
3 Strategies To Help Prevent A Negative Cash Flow In Retirement
If you’re five to 10 years from retirement you still have time to get back on track. Here are three strategies to consider:
Work Till 62 To Get The FERS 10% Bonus: When you retire at age 62 (or later), with at least 20 years of service, your pension is calculated using the 1.1% formula instead of usual 1% formula. This increases your monthly benefit by 10% for the rest of your life.
Max Out Your TSP Contributions: In 2024, the Thrift Savings Plan (TSP) contribution limit has been increased to $23,000 while the Catch-Up Contribution limit is $7,500. If you’re age 50 and older you can contribute $30,500 to your TSP this year.
Consider A Fixed Indexed Annuity (FIA): An FIA is an insurance product you can purchase from an insurance carrier. It can provide you with guaranteed income for life plus other benefits you can add with riders.
Don’t Wait For The Last Minute To Calculate Cash Flow In Retirement If you wait too long, you may not have enough time to mitigate a potential income gap while you’re still working. Connect with an FRC® trained advisor who can run no-obligation reports that give you the big picture of your finances in retirement.
