Tip: Easy Formulas for Basic Retirement Analysis.
Here's a few easy formulas to give you a quick estimate of your retirement position:
Simple Global Retirement Estimate:
So it's Friday afternoon and you are sitting at your federal desk and you find out that you have a new high-3! Great news. So they tell you that you now have a new high-3 of $100,000 and you want to see what your retirement could look like but you don't have all your retirement data and papers with you. What can you do?
An easy way to calculate a BALLPARK after-tax estimate of your complete retirement is as follows:
Take the new amount, $100,000, and multiply by an estimate that is commonly used to give you a reasonable retirement. Usually this amount is between 70% - 80%. It may even be higher, depending on how high your TSP balance is, and reach maybe 85% to 90%. It may be lower, depending on your TSP, but also your lifestyle can be a great equalizer. Say for example, if you have paid off your credit card debt or have your house paid off, 60% - 65% may give you very reasonable retirement with little or no debt! This is just to get a fast and quick estimate to help you decide what to do next. So don't sweat the small stuff just yet! Just pick a percentage you think is reasonable for your financial situation and life.
Lets try 75% just for example:
$100,000 X 75% = $75,000.
Then multiply the $75,000 by your after-tax rate. For the new tax laws in effect from 2018 - 2022 that would be the following for most federal employees:
Married, filing Joint:
10% Up to $19,050
12% Up to $77,400.
22% Up to $165,000
24% Up to $315,000
32% Up to $400,000
35% Up to $600,000
37% Over $600,000
10% Up to $9,525
12% Up to $38,700
22% Up to $82,500
24% Up to $157,500
32% Up to $200,000
35% Up to $500,000
37% Over $500,000
In this example you are an unmarried individual with $100,000 high-3. Then your tax rate is 24%. So your after-tax rate is
1-24% = 76%.
Now $75,000 X 76% = $57,000 for the year. That would be equal to $4,750 per month. I am not including state taxes, health insurance, life insurance, long term care insurance or any tax adjustments.
This is a quick and easy way to see where you are at in your retirement. But what does this figure take into account? This includes your FERS retirement that is made up of 3 main parts:
1. Basic Annuity (Pension)
2. Retiree Annuity Supplement (RAS) , also known as social security bridge or supplement (formula below)
3. Thrift Savings Plan
Each of these parts have a specific role to play in your retirement and you need to consider each separately for you to understand the easy calculation above:
1. The Basic Annuity is dependent on how many years you have been with the government. For most people that would come to 20 to 40 years of service. If your a Special Category Employee (SCE) (like Air Traffic Controllers or Law Enforcement) then that would get you to 20 to 35 years of service. It could also include military, prior federal service time and unused sick leave.
2. The RAS would be a factor up to age 62, when you become eligible for regular social security (calculation below). You have options to choose your social security from ages 62 to 70.
3. The TSP is the "X" factor and is probably the major contributing factor for your FERS retirement on whether it come out higher or lower.
What you now would need to do is get a more in-depth retirement estimate. Perhaps you can get the estimate from your employing agency or someone else who is more involved in calculating the retirement numbers. They would breakdown your retirement to each of these different parts.
By using this calculation you have an easy way to see how your retirement looks. Like I said, you may actually be higher or lower than 75%, but you really need to do a more detailed analysis to find those more accurate numbers for your retirement.
Retiree Annuity Supplement (RAS):
This formula is also very simple but many people get confused. The RAS is known as a social security bridge or supplement, to help the retiree get to age 62. It is not paid by the Social Security Administration but by the Office of Personnel Management (OPM).
The basic formula that will get you within a few dollars of your actual RAS payment during retirement is as follows:
Take the number of actual years you worked for the US Government and don't count any military time.
So lets say you worked for 30 years. Great job. You take 30 and divide it by a number that OPM uses as basically the work life of an individual, which is considered 40 years for the time period from age 22 to age 62. So 30 divided by 40 equals 75%.
Now this would be a good time for you to register on the social security website. This is a very important thing for you to do whether you are ready to retire or not. It shows all the years you contributed to social security. It also shows your social security pay out when you reach the ages of 62, 66/67, and 70, as of today. You need to know this info for your retirement planning, so it's probably a good idea to check out this website now.
So for the RAS estimate, you take the 75% and multiply by your social security estimate for age 62, and this should be within a few dollars of your actual monthly RAS payment for retirement. I think my estimate was within $33 of my actual RAS pay out.
Example: 75% X $2,000 (Social Security estimate at age 62) = $1,500 monthly RAS estimate.
$1,500 X 12 months = $18,000 yearly RAS estimate.
Marginal Tax Rate:
This is a simple but important tax calculation you should know. This will tell you what an additional dollar amount that increases your total income or retirement pay would cost you in taxes.
Lets say for your retirement, you will make $10,000 more this year because you are taking out a little more TSP or something similar. What does that do to your taxes?
The definition of the Marginal Tax Rate is basically the change in your tax liability divided by the change in your income. So if your Marginal Tax Rate for a Married Filing Joint (from the chart above) who is above $77,400, is 22%, then you would be paying: $10,000 X 22% = $2,200 extra in taxes for this year due to that $10,000 TSP increase.
Remember, this is for tax planning. What you actually end up paying in taxes is not set in stone. With deductions, credits, Alternative Minimum Tax (AMT) or any other changes in your taxes or financial situation, you may actually end up paying less or more in taxes. This is just to give you an estimate of the change in your taxes from an increase in income.
All these estimates shown above are just for the BALLPARK estimate. You really need to go to your agency or a retirement specialist or a tax adviser to be sure how your finances will look. You can't wait until retirement to make the detailed projections. BALLPARK helps. It basically is the starting line for your retirement planning. Then you get into the details so you can make sure there will be no surprises for you at retirement.