The Foreign Service Journal, September 2007

S E P T E M B E R 2 0 0 7 / F O R E I G N S E R V I C E J O U R N A L 17 W ho in their late 20s to early 50s, preoccupied with the demands of work, family and daily life, has time to plan for a retirement that is years or even decades away? The answer is that we all had better give retirement some advance thought if we wish to be well- positioned to enjoy life after the Foreign Service. I know you’re busy, so here is a quick guide for early- and mid-career employees who realize that retirement planning is important, but have not yet gotten started. Show Me the Money Many Foreign Service members have only a vague idea of what makes up their retirement package. That, obviously, makes it impossible to do even basic planning. So here is an overview. Because this article is aimed at employees who are still fairly far from retirement, it focuses on those of us who joined after 1983 and are thus in the “new” Foreign Service Pension System. Employees who fall under other systems — such as the “old” Foreign Service Retirement and Disability System, the law enforce- ment plan, the Physician’s Compar- ability Allowance, or those eligible to retire before 20 years of service — can consult the Department of State retirement office’s Web site (www. RNet.state.gov) for information on those retirement plans. Once FSPS participants qualify for retirement, here is what we receive: • Pension: Under the FSPS, our pension is based on our “high three” average salary and years of service. The “high three” salary is calculated by adding our average basic pay (determined by multiplying each salary by the number of days that it was in effect) for our three highest- paid consecutive years and then dividing by three. Basic pay includes regular pay, domestic locality pay and overseas virtual locality pay, but excludes allowances, differentials, bonuses and overtime. This “high three” salary is then multiplied by 1.7 percent for each of the first 20 years of service plus 1 percent for each additional year. For example, an employee with 25 years of service and a “high three” salary of $100,000 would qualify for an annual annuity of $39,000. That amount, however, provides no benefits to a surviving spouse after the annuitant’s death. Providing maximum survivor benefits reduces the annuity by 10 percent to $35,100. • Thrift Savings Plan: As you can see, no matter how many years you serve, your FSPS annuity will not come close to replacing your pre- retirement income. Instead, under FSPS, the Thrift Savings Plan must be a key part of retirement planning. Contribute at least 5 percent of your salary and Uncle Sam will match that contribution — “free” money that no one should pass up. Unless you are independently wealthy, to position yourself well for retirement you should contribute at least 10 percent of your salary to TSP. Those who can should contribute as close to the annual maximum ($15,500 in 2007) as possible and take advantage of “make up” contributions (up to $5,000 in 2007) after age 50. For example, an employee who contri- buted near the maximum amount for the past 20 years and kept most of it in the high average return stock market “C” fund might have around $400,000 saved today. Retiring now and with- drawing the recommended 4 percent of the balance per year would yield payments of $16,000 a year. Continu- ing to work and making maximum contributions for another five years might yield a balance of $650,000 and annual withdrawals of $26,000. • Social Security: FSPS mem- bers pay into Social Security through- out our careers and thus qualify for benefits beginning as early as age 62 for those willing to take reduced payments in return for a longer bene- fit period. However, because most Foreign Service members qualify to retire before age 62, federal law af- fords FSPS members an annuity supplement that approximates the missing Social Security payment until Retirement Planning 101 B Y J OHN K. N ALAND FS K NOW -H OW No matter how many years you serve, your FSPS annuity will not come close to replacing your pre-retirement income.