Most retirement plans start with understanding your “number” — the amount you’ll need to save before you can stop working. Many Feds begin with a rough estimate, aiming to replace 70% to 80% of their salary. It’s a common shortcut that’s quick, easy... and often wrong.
While your salary covers your current lifestyle and expenses, it’s rarely an accurate reflection of what you’ll actually need in retirement. You may be using a significant part of your income for things you might not need later, such as retirement savings, mortgage payments, or college costs. Or you may plan to elevate your lifestyle in retirement, spending more on travel, hobbies, or other goals.
If your estimate is off, you could end up working longer than necessary or retiring with less than you need, so accuracy is key.
Start with the 25x Rule
Since it’s based on retirement income needs, rather than your current salary, the 25x Rule can help you create a more realistic estimate. Here’s how to calculate it in three simple steps.
Step 1: Estimate how much income you need annually in retirement.
Step 2: Subtract your fixed retirement income (such as your pension and Social Security) from your annual retirement goal to find your income gap.
Step 3: Multiply your income gap by 25. This will give you a savings target, based on a 4% initial withdrawal rate.
If you’re not sure what you can expect from your pension or annuity, a federal retirement number calculator can help you estimate these guaranteed income sources before moving on to the next step.
Once you begin taking withdrawals, help to strengthen your position by considering to follow these best practices:
- Set an income floor by funding your essential spending with stable income sources, like your pension, Social Security, and G Fund.
- Use equities for flexibility. Fund discretionary expenses, like travel or hobbies, with variable, growth-oriented investments.
- Build a buffer. Hold one to three years of planned withdrawals in cash or short-term bonds to reduce the risk of having to sell in a down market.
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Use Levers to Reach or Shrink Your Number
If your savings goal seems out of reach, small changes may make a big difference. Consider these adjustments:
- Work longer or delay Social Securityto raise guaranteed income.
- Reduce fixed costs(for example, downsize or pay down debt) to lower your spending target.
- Increase retirement plan savings and use catch-up contributions.
- Adjust your asset mix to ensure it’s aligned with your time horizon.
Stress-Test Your Plan
A plan that looks good on paper is a great start. But the work doesn’t stop there. To feel confident going into retirement, you’ll need to understand how the plan holds up if the unexpected happens.
Start by running base, bear, and bull market scenarios. See how your plan holds up if your returns are lower early on. Try building in one-off costs like a major medical expense or home repair.
Pay attention to tax brackets and the impact of your required minimum distributions (RMDs) to avoid unintentional spikes that could push you into a higher bracket or trigger IRMAA (Income-Related Monthly Adjustment Amount) thresholds.
Lastly, decide how you’ll handle a rough year. Planning for a small trim, such as 5% to 10% of discretionary spending, can help give you flexibility when you need it.
Turn Your Target Into a Strategy
An effective retirement plan starts with a clear number, a few smart levers, and a strategy that holds up under pressure. While the process can be complex, you don’t have to do it alone.
Contact the team at Serving Those Who Serve at [email protected] to connect with a CFP® professional who specializes in running retirement stress tests for federal employees.
The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **
