The Foreign Service Journal, September 2007

age 62, when it kicks in. This annuity supplement is ap- proximately $35 per month for each year of FSPS service. Thus, someone who worked 25 years would qualify for an annuity supplement of around $10,500 per year. That amount, however, is subject to reduction if the annuitant goes back to work and receives wage earnings in excess of around $12,000 per year. As you can see, our sample em- ployee (a married person retiring after 25 years of service with an average high-three salary of $100,000) would receive around $71,600 a year in pension, TSP withdrawals and annuity supplement. Your numbers, of course, will differ based on your salary history, length of service, TSP contributions and rate of return, and retirement age. You can estimate your numbers by following these three steps: • Run the Annuity Benefits Cal- culator via the “e-Phone” application on the State Department intranet. • Run the TSP Calculator on www. tsp.gov. • Estimate your annual annuity supplement by multiplying your plan- ned years of service by $420 or, if you plan to retire after age 61, consult the most recent “Your Social Security Benefits” mailed to you by the Social Security Administration. Reality Check How much money will you need to retire comfortably? Experts say that many people can continue their cur- rent lifestyles into retirement on 85 percent of their pre-retirement gross income. One reason for that reduced need is that deductions for Social Security, TSP, Medicare, and FSPS contributions can consume 15 percent or more of pre-retirement gross in- come. Those deductions end at retirement, thereby reducing the drop-in “take home” income. Of course, your retirement income needs may be higher or lower than the 85-percent guideline, depending on such things as your desired retirement lifestyle, possible income from a still-working spouse, and future financial commitments, such as children’s college expenses. Pulling all this data together, you can judge how realistic your target retirement date is by estimating how much retirement income you will need and then running your own annuity, TSP and annuity supplement numbers. If you have no idea of when you might want to retire, then run your numbers based on first eligibility — which, for most em- ployees, is at age 50 with at least 20 years of service. If the calculations fall short of how much money you desire, then you need to adjust plans. For example, staying in the Foreign Service even a few additional years will substantially increase your annuity by raising both the multiplication factor and the “high three” average salary. Post- retirement employment is an option exercised by many Foreign Service retirees, but be sure to study the rules on how earnings can affect your annuity and Social Security payments. Another option is to invest more of your take-home pay in TSP, the stock market, rental property and/or a tra- ditional Individual Retirement Ac- count. Feathering Your Nest As you plan your future finances, there are several things to keep in mind in order to best position your- self for retirement: • How you manage your TSP sav- ings while you are still working will have a major effect on your retire- ment finances. Because most current employees will need to draw on their TSP savings 30, 40, or even 50 years from now, most experts recommend investing in funds with relatively high average rates of return (the C, S, I and the long-range L funds) to increase the chances that your TSP savings will be around as long as you are. Conversely, keeping most money in funds with lower average yields (the G and F funds) may allow infla- tion to eventually outpace earnings. • While saving for retirement is vital, doing so can be difficult de- pending on your cash flow situation. To increase savings, some experts urge cutting back on frequent small splurges that add up over time — for example, that daily gourmet coffee. Other experts say to cut back on big purchases, such as buying a $35,000 car when a $25,000 model will do just fine. Most experts endorse the tactic of “pay yourself first” by, for example, signing up for a large TSP payroll deduction so those funds never enter your take-home pay for discretionary spending. If you receive a high hard- ship differential or an inheritance, consider investing a chunk of it in retirement savings. • Where you retire can have an impact on your net income. The IRS taxes annuity payments, TSP with- drawals and annuity supplements, but 18 F O R E I G N S E R V I C E J O U R N A L / S E P T E M B E R 2 0 0 7 F S K N O W - H O W Experts say that many people can continue their current lifestyles into retirement on 85 percent of their pre-retirement gross income.