How Much Should I Have?

"What should I have in my TSP?" is a question I get weekly. Sometimes it comes in the form of a comparison, "What is the typical balance you see of someone retiring?" I think it's dangerous to compare yourself to others as everyone's situation is unique to them, and what works for one person may be completely inadequate for you. But I understand the sentiment, so I'll provide some framework to help you develop your goals.

Everyone knows they need to save. Even if they aren’t doing it, they at least know they are supposed to. But many people have questions regarding how much they should have saved. What should my nest egg be at retirement?

Since the amount of money saved is often tied to the question of when you can stop working, it becomes critical to know what that target amount should be.

We’ve all saved for things that cost a certain amount: Maybe a car, a down payment on a house, an engagement ring, a Harley, or a vacation. Those were fixed costs that you identified, and you knew once you saved that specific amount of money, you could then purchase that specific item.

Retirement is a little bit different. The target price is fuzzy. There is not a solid, fixed price tag out there telling you what retirement is going to cost. There are too many variables: inflation, life expectancy, medical bills, future hobbies and interests, and just the general unknowns about expenses and investments. It is these unknowns that necessitate the use of estimates. If you’ve ever used an online retirement calculator, you see this in all the assumptions it asks you to make: estimate your expected return on investments, estimate your life expectancy, estimate your expenses, and so on. There's an inherent problem in all of these things though: It's a pretty tough thing to sit down and pick exactly when you’re going to die and exactly how much the market is going to make until then.

If you’ve done any retirement planning research at all, you’ve probably come across one of these articles that tells you how much you're supposed to have as a multiple of your current salary. For example, the article might say that you need to save 10 times your current salary before you retire, implying you can’t retire until you have this much saved. The mantra seems to be, “Save This Amount or Forget Retirement!” Here are a few examples. Fidelity Investments recommends you should have 8 to 10 times your salary saved before you can retire. T. Rowe Price recommends 11 to 14 times your salary. Morningstar (the mutual fund people), recommend you should have enough saved to generate income replacement of 70-80%. Ok, so let’s unpack these numbers a bit.

Assume you make $120,000 a year:

• Fidelity wants you to have $960,000 to $1.2 million in the bank.

• T. Rowe Price wants a healthy $1.3 to $1.7 million balance.

• Using Morningstar’s approach, replacing 70% of your salary would be $84,000 a year. In order to earn that much in investments each year, you would need a balance of $1.4 million earning 6% interest.

In short, that’s a lot of money, no matter whose recommendation you’re going by. The truth is few people will amass that much in savings prior to retirement. In fact, the statistics show things are far worse than most people think.

Last year, Northwestern Mutual conducted a survey which revealed that 21% of Americans have saved exactly zero for retirement. 33% have saved less than $5,000. Only 25% of Americans have saved more than $200,000. The average amount saved? $84,000. Considering the average salary in the US is around $60k, the average worker has saved less than a year and a half of his salary, over their entire working lifetime.

When it comes to retirement, it appears as if most Americans are adopting a 3-pronged strategy:

1. Work late into life,

2. Depend on a fragile Social Security check, 

3. Be broke.

If none of those sound very appealing, read on and let’s see if we can improve your outlook.

As you should know, a FERS retirement is made up of the FERS annuity, the TSP, and the FERS Retirement Annuity Supplement (RAS), which will end at 62, when Social Security can be had. Clearly you should be saving in the TSP, but is it possible to have the recommended $1 million plus? And, more importantly, is it necessary to have $1 million in the TSP before you can retire? Short answers are “It is possible, but not probable” to the first, and “Definitely not” to the second. Many people are TSP millionaires (as of 2018, there are just over 23,000 participants with balances over $1 million). But the vast majority are not—a little over 5 million TSP participants are not millionaires.

However, the good news is that you don’t have to be. Remember that FERS annuity? Most savings recommendations do not account for a perpetual annuity because well, they are just so rare these days. But that is a permanent, inflation-adjusted check, and a partial replacement of income (remember the Morningstar recommendation above)?

But how do we compare that to having savings? How do we compare a monthly check to having a large sum of money saved up, to see how we measure up to the recommendations of“experts?” It’s actually pretty simple. Using some basic math, we can equate a guaranteed pension to the equivalent of a savings account balance.

Assume your FERS annuity is $50,000 a year, not counting the Supplement for a moment. (I realize some of you reading this will not receive this much in an annuity check, but I write predominantly to FERS SCE’s and this is a very average amount for them. Whatever your estimated annuity is, just substitute it for the next steps.) This is a guaranteed amount. It is also adjusted up for inflation, but we’ll set that aside for now for simplicity’s sake. This amount will come each year for the rest of your life as long as the US Government is solvent and honors its obligations.

So, how does this equate to a savings account?

If $50,000 is received each year as a guaranteed annuity, it is similar to receiving $50,000 a year in investment income. Most of you receive some sort of investment income now—either dividends from owning a stock, interest from owning bonds or a CD, or gains produced in your TSP account. Therefore, how much do we have to have in a savings account to generate $50,000 a year in interest? Well, that depends partly on what the interest rate is, correct? Let’s just assume that since the annuity check is guaranteed by the US Government, we’ll use the long-term G Fund average since that interest is also guaranteed by the USG. The G Fund started on April 1, 1987. Since that date, it has averaged 5.03% annually.

(Yes, I can already hear the screams now—“The G Fund doesn’t average 5%!!!!” While it has NOT averaged that much over the last 10 years or so, it has averaged that amount since 1987. Recent rates have been artificially low, because of unprecedented government and Federal Reserve measures. Which is an entirely other paper altogether).

Getting back to our $50k check...To earn that annually at 5%, one would need to have an account balance of $1 million. ($1,000,000 x .05 = $50,000). To look at it another way, if you have $1 million saved in an account and could invest it in bonds returning 5% interest, you would receive $50,000 a year. Therefore, receiving a $50,000 pension is equal to having $1 million saved for retirement.

If we look back up to the initial recommendations for nest eggs, we see that our $1 million is on the lower side of the range, but not too far off. Keep in mind, this is the annuity portion of your check only. It does not account for the RAS, which would raise the equivalent savings balance. I left the RAS out in the interest of conservatism, because it is only for a few years, and there are some that will work that won’t receive it at all.

(If your check is not $50,000, just take your estimated amount and divide by 5% to find your equivalent savings balance. For example, if your expected pension is $20,000, divide $20,000 by .05 and you get $400,000. That would be your equivalent savings amount).

The one caveat to this calculation is that it is not completely equivalent to a savings account in all respects, because that money doesn’t actually exist in an account somewhere that you have access to. You are limited to the monthly check itself, not the theoretical balance. For example, while you receive the equivalent of 5% of a $1 million account, you can’t pull an extra $100k out in a given year like you could in an actual savings account that has $1 million in it. But, it replicates it enough for our purposes to help determine how valuable our annuity is when comparing to common recommendations.

To sum all of this up, if you have a TSP balance of $500,000 and a FERS Annuity of $50,000 annually, it is very much the equivalent of having $1.5 million saved toward retirement, putting you squarely in the middle of the T. Rowe Price recommendation. So when you read these articles suggesting you have to have $1 million or $2 million saved before you can retire, don’t be too discouraged. Your federal pension can equate to a large percentage of that.

How much should my TSP balance be?

This is the part of your retirement that you can save up yourself. How much you need depends on your individual situation and how you are planning to live in retirement. Some of those calculations are covered in my series, “I Can’t Afford To Retire”, and I won’t rewrite them here. Determining your income needs in retirement is best done with a financial planner, a CPA, or some other professional. But you can get an idea of what your income would be based on your TSP balance.

Let’s keep with our same example. A $50,000 annuity check. Let’s also assume the RAS will be somewhere in the ballpark of $14,000, giving a total annual income of $64,000. Let’s say you’ve estimated your expenses and you think you need to make $90,000 in retirement before taxes and you don’t want to work. You’d rather pull money from your TSP than have to drive in to a soul-sucking office each day. Because you are $26,000 short, you’ll need to pull that from TSP. If you have read my paper “Safe Withdrawal Rates”, you know that 4% is generally accepted to be a rate of withdrawal that will protect the principal and even have a probability of letting it continue to grow. So what balance allows me to pull out 4% and have that amount be $26,000? The answer is $650,000. ($26,000 / .04 = $650,000). Many FERS SCE’s I talk to that are getting ready to retire have between $500,000 and $700,000. Obviously some more and some less, but that is the average I see.

Let’s summarize this rather oversimplified example in light of current retirement recommendations:

Having $650,000 in the TSP and receiving a FERS Annuity of $50,000 annually could be equated to having saved $1.65 million.

And provide $90,000 a year in income.

Understand that I am not saying you need a certain minimum to retire—that would be different for each person. I am simply illustrating how you can read about retirement recommendations and translate your pension into an amount that can be used to judge yourself against the recommendations that are out there in the retirement planning world.

Finally, note that this is only one way to estimate what you need for retirement. Another way is to simply figure up your expenses and determine how much you need to cover them. This is probably the approach used more often with government employees because the amount they are going to be receiving in the form of a pension is a known quantity. They can easily compare it to their expenses to determine if there is a shortfall or surplus each month. The general public does not enjoy the same benefit for the most part of knowing exactly what will come in each month, so other methods like the total amount saved is more common with them.