financial planner Stephen Zelcer

Q&A: Is the 3-legged stool (FERS + SS + TSP) enough?

Is the 3-legged stool (FERS + SS + TSP) enough?

Is the 3-legged stool enough?


I am contributing 5% to my TSP, getting the maximum agency match, and I’m also paying into Social Security and the Federal Employee Retirement System (FERS). 

Is that going to be enough to retire on?


I want to answer this question on two levels. 
The first level will be addressing the “average Joe.”  Meaning, without knowing who you are and without personalizing your retirement plans and financial goals, I will try to address you as a statistical one-size-fits-all reality.
The second level is more personalized and thus more realistic. It recognizes that you are not just a collection of “rule of thumbs.” You have your wants and your goals. The compiled data of other people’s retirement, and the resulting statistical stick figure reality it creates has little bearing on your personal and financial plans.

The “Average Joe”
Before I go into my first level answer, I want to show you how the above person compares to other American employees.

  • Contributions into Social Security equals 6.2% of one’s wages.
  • FERS retirement contributions range between 0.8% – 4.4% of salary (depending upon year hired).
  • A 5% contribution to the TSP gets a 5% agency match for a total of 10%.

Doing the math, this FERS person is saving between 17% – 20.6% of their salary towards retirement! Whoa! 
Compare that with other employed Americans:

  • Contributions into Social Security are also 6.2%.
  • Less than 20% of Americans have a pension through their employer (see HERE).  So that doesn’t match up at all.
  • Less than half of non-government employees participate in a Employer sponsored retirement plan (see HERE).  So, that half doesn’t match up at all. 
  • Of those who do have access to an employer sponsored retirement plan, Average Employee 401(k) (or other employer sponsored retirement plans) contribution rate equals 6.8%
  • Average Employer Contributions into retirement accounts equals 4.8% (see HERE for the last two stats).

Add it up and the total is about 17.8% (for those who have access to an employer plan). 
So, in our question above, we are obviously ahead of those who do not have an employer plan, but quite “average” when compared to those who do have access to an employer plan. 
Is our “average Joe” going to have enough to retire?

Calculating Replacement Income:
How much salary replacement will FERS + SS + TSP provide?

How much will FERS provide?

A FERS employee will have a FERS pension that is determined by their highest average salary and their total years of creditable service. The formula is typically 1% per year of service. This means, someone with 30 years of service will have a pension that equals 30% (30 years x 1%) of their highest average salary.
A FERS person retiring with more than 20 years of service and above the age of 62 will receive 1.1% per year of creditable service. In our example of 30 years of service, the FERS pension will equal 33% (30 years x 1.1%). 

How much will Social Security provide?

(I am not going to address the stability of the Social Security system here.) 
Studies (see HERE for an example) have pointed out that the percent of your salary that your Social Security benefit replaces depends upon your level of income. For lower income earners, their Social Security benefit can replace over 50% of their salary. For upper income earners Social Security may only replace 20% of your salary. Many federal employees will have pre-retirement salaries at or above the Social Security “Cap.” As such, a federal employee will likely only have 20% of their salary replaced by Social Security. 

How much will your Thrift Savings Plan provide?

If you spend 30 years saving 10% of your salary each year (your 5% + your agency’s matching 5%), and your TSP grows at the rate of inflation, you will have saved 300% of your salary. A 5% distribution from that 300% will yield 15% of your salary.  (If your TSP growth outpaces inflation, you’ll have even more!)
Add them all up:

  • FERS = 30% – 33%
  • Social Security = 20%
  • TSP = 15%

TOTAL = 65% – 68%. 
What this means is that a FERS person will likely replace 65% – 68% of their pre-retirement income. Is that enough to retire on?  To answer that, we need to look specifically at you.  

The “Non-Average Joe”

Up until now we haven’t even looked at YOU. We’ve been dealing with stats, assuming you fit into everybody else’s cumulative reality. Do you really want your HR (or your financial advisor) to super-impose someone else’s retirement image onto yours? That’s like asking a seamstress to tailor your clothing when it’s being worn by a mannequin! It may look great on someone, but that someone may not be you!

To responsibly answer the above question, we need to understand YOU. Where are you right now and where are you trying to get to? What assets do you have in place?  What liabilities do you have and when will they go away? How’s your current cash flow? What are your personal goals? What are your risk sensitivities? Do you want to save “just enough” for retirement? Do you want to maximize your financial potential? 

For those who seriously want to plan their future we need to define your starting point and your goals – VERY CLEARLY. Even for someone thirty years from retirement, they may not even understand the whole retirement mentality but they can appreciate the idea of saving for the future. By asking enough of the right questions, we can develop and define goals. Without goals, we can’t answer the above question. With goals, we can.

The best financial plans are the ones with the clearest goals. If you need help clarifying your goals and if you want someone who will ask you the right questions to put you on the right path, you should join my upcoming financial planning class. Here.
I look forward to helping you.

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