Too many workers focus on one aspect of retirement


While the media, investment industry and far too many investors are obsessed with the upside potential of how much this or that investment might return, the truth is that maximizing rates of return is not the primary goal of a prudent retirement plan. If you want to maximize the standard of living that can be supported by your resources in retirement, focus on controlling risk and neutralizing threats. That’s because downside surprises tend to do more damage to retirement cash flow than upside surprises do to improve it.

Threats to your retirement plan abound. Whether you’re still working or already retired, your standard of living in retirement faces a never-ending series of threats. Many of these threats are beyond your control — proposals to switch to a high-five rather than a high-three salary average for computing annuities, pay freezes, zero-dollar cost-of-living adjustments on annuities, investment market crashes, runaway inflation, skyrocketing tax rates. Add to these the risk of making mistakes in your planning or other threats within your control, and it’s no wonder that many retirees wind up impoverished by the end of their lives.

Most of the career feds I’ve worked with prefer the same, or an even better, standard of living in retirement than they lived with while working. If you fit this description, then your annuity — and Social Security for Federal Employees Retirement System annuitants — won’t be enough to meet your needs. You’ll have to rely on supplemental income from other sources, probably including your Thrift Savings Plan account and other savings. The old “70 or 80 percent of pre-retirement income” rule of thumb just doesn’t apply.

In my experience, most federal employees without professional guidance focus, almost exclusively, on their retirement date as the key variable in their retirement planning. Most federal annuitants tend to focus on trying to limit their spending to what can be supported by their after-tax retirement income from their annuity and, if applicable, Social Security. They tend to do this because they’re not sure how much they can safely withdraw from their savings, either on a regular basis, or from time to time.

If they do invade their savings for retirement income, it’s usually either because they have no choice and no clue about the long-term consequences of the move, or they are relying on faulty expectations about rates of return from their portfolio. If you think you can safely base your monthly or annual withdrawals on an expected rate of return, say 5 percent per year, you’re making this mistake. It’s not the average rate of return that matters, it’s the actual rate you realize as you are taking withdrawals that affects the viability of the plan.

In each of these cases, investors are either needlessly sacrificing their lifestyle in retirement or recklessly risking outliving their money. Like the risks you face, numerous variables affect the success or failure of your retirement plan. Your retirement date is just one of those variables.

How much you save, how much and when you plan to spend, how much you’d like to leave behind, where you live, and how you invest and manage your money are all important factors, usually within your control. Add to these controllable factors a variety of circumstances beyond your control, and retirement planning becomes incredibly complex. But there are ways to make a plan work, even in the face of unexpected changes.

Take the potential, for example, for a change in the way annuities are calculated — shifting from high-three to high-five — as has been proposed. Affected feds may be motivated to retire earlier, if they can do so before a change takes effect; or later, if the reduction in their annuity makes an earlier retirement impossible. This focus on retirement date oversimplifies the issue for an individual employee.

Sure, delaying retirement by a year will likely offset the effect of the change and allow you to maintain your planned standard of living in retirement, but so will shifting to a slightly more aggressive investment strategy, or saving a little more before retirement, or reducing your spending a little later in life, or taking steps to reduce your tax burden.

In many cases, a change from high-three to high-five can be absorbed without any change in the retirement date, and without affecting your standard of living in retirement. But, to make this happen, you’ll need to consider all of the variables that affect the outcome, not just one.


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Mike Miles is a Certified Financial Planner licensee and principal adviser for Variplan LLC, an independent fiduciary in Vienna, Virginia. Email your financial questions to and view his blog at

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