So, your retirement is getting close enough, it is starting to feel more real. Maybe it is next year, maybe two years away, or maybe even next month. Congratulations! I am sure it is well deserved. You have worked hard over your career to serve our country. You have been saving in your Thrift Savings Plan (TSP) and, hopefully, other retirement accounts. You have a pension. Perhaps you also have a military retirement, and you are probably going to be receiving Social Security benefits soon, or income investments such as rental properties, bonds, or dividend-paying stocks.
Whatever your mix of planning income for retirement, one certainty is that it won’t come at the same time. You will need to plan for when it comes in and plan to fill the gaps between payments. After all, the bills don’t stop.
As a Federal employee, you need to plan ahead to ensure you are covered until you start receiving your full pension and your TSP is available for withdrawals. When you retire, this is what will typically happen:
- 2 weeks after your retirement date you will receive your last paycheck
- 2-4 weeks after that you will receive your annual leave lump sum if you have any to cash out (see our previous article on maximizing your annual leave payout)
- 2-4 weeks after that your interim payments will begin
It is important you understand the interim payments. Interim payments are what you receive for your pension until the Office of Personnel Management issues final adjudication on your retirement claim. They are about 60-70% of your calculated pension amount. In a worst-case scenario, the final adjudication could take 9-12 months, so you need to plan ahead for this reduced income. Once the final adjudication occurs, you might receive a payment for the difference of what you should have received and what the interim payments were, but after taxes, health insurance premiums, and other deductions, it typically isn’t very much.
It is wise to set aside enough to cover 3-5 months of living expenses. This is separate from your emergency fund, which covers the unexpected. If you use that for your expected expenses, such as utility bills, health insurance, or car payments, you won’t have it for the unexpected.
How do you determine how much to set aside? Look at your budget – what is necessary? Clearly, you need to cover housing, food, car, gas, insurance, loan payments, etc. But, there might be other expenses that aren’t “necessary,” but you should still plan on them during this time. Perhaps you want to keep donating to your church or another charity, set aside money for Christmas presents for the grandkids or saving for your first retirement vacation. If you take a break on setting aside funds during this time, you will need to catch up later.
Once you are into a rhythm of income from your TSP, full pension, and other sources, you can move whatever you didn’t spend into another category – shore up the rainy day fund, upgrade the cabin on the cruise, or give a boost to your favorite charity.
However it ends, it starts with planning. So, plan now for the income gap and it will enable a smoother transition into retirement.
Disclosures: Any opinions are those of Wes Battle and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. 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 selected. Dividends are not guaranteed and must be authorized by the company’s board of directors.