Am I on Track to Retire?

 

Not sure how much you need to retire. Before you overwhelm yourself with numbers and general what “They” say, about ten times tour income, try looking at it from a different perspective. When would you like to retire? What is your second age choice? Will your bills be paid off by then? Mortgage, car, credit cards, etc. If so, what will your expenses be without those bills?

I will try to take you through the process of how you can decipher your own situation, and help you decide if you are on the right track to retire. Spoiler Alert: This article may be longer than others in the past but stick with me, we have a lot to uncover. I will try to break this down by sections to keep from losing anyone.

Age

First let’s pick the age you want to retire. If you are some of the lucky few federal employees that will be eligible to retire at age 50, with 20 years of service, before you jump for joy, decide is 50 the age you want to leave your job. Or, you may decide age 62 is your perfect number to retire. Next in the list is…

Bills

Whatever your perfect age is, will your bills be paid off and what bills will you have left to pay in retirement? Now when thinking of bills to pay off prior to retirement, think of the ones that have a bigger impact on your day to day life. By this, I mean things like the mortgage if you own a home or plan to own one prior to retirement. Car note is another large expense that can have an impact on your expenses in retirement along with any credit card debt. These three expenses alone can eat up more than 50% of you take home pay while you are working and make it seem nearly impossible that you will ever be able to retire comfortably. So let’s break these down into sub categories here..

                Mortgage

How long do you have until your mortgage is paid off? Does the date coincide with the date you would like to retire or is it due to be paid off several years after your ideal retirement age? If your mortgage is due to be paid off by the time you wish to retire, things are already look up for you. The only thing I may recommend is to try to add a little extra money toward the principle so that you may have a few mortgage free months or years before you say goodbye to your job. Plus that money can be saved and used to help you transition into receiving paychecks once a month.

 If you are in the second category and your mortgage will not be paid off until after you retire, you may want to look at refinancing or extra principle payments to make your goal. For example: If you have 10 years until you retire but 20 years left on your mortgage, take some time to play around with some mortgage calculators, I like to use bankrate or EZ Calculator app. Also look on your bank statement to see what your mortgage balance is and do a quick internet search to find out the current interest rates on 10 year loans since this is how long you have until you retire. As of today, 10 and 15 year rates are around 2.34%. So this is what I will go with for this example.

Using my trusty EZ Calculator app, loan calculator feature. We will say you purchased your home 10 years ago on a 30 year mortgage for $200,000 at 4% interest rate yielding a monthly payment of $955 a month, with taxes and insurance added your actual payment maybe more like $1,200.

Using the amortization feature in the app, I can see that after 120 on time payments (10 years), you now owe $157,568.

So now we will take the $157,568 and amortize it over 10 years at the 2.34% interest rate and we come up with a payment of $1474 and with taxes and insurance added your payment may look more like $1724. I know, your eyes are as big as mine when you are looking at an extra payment of $500 more per month to try and pay off your house 10 years earlier. So to relieve the pain in our chest, caused by looking at this number, we take the same numbers using a 15 year mortgage as our template instead and see what we come up with.

Taking the $157,568 with a 15 year mortgage, at 2.34% interest rate the payment is now $1,039 or approximately $1,289 with taxes and insurance. Wow, I don’t know about you, but I am liking this number much better and it is less than $100 difference, plus the mortgage is paid off 5 years earlier. But ooh it is still 5 years after you plan to retire. Don’t fret just yet we will come back to this later in the article, and cover those 5 years. But on the positive side you are 5 years closer to retiring at the age you would like to in this example…woo hoo.

 

Car Payments

The next largest expense many of us have is car payments. So in this example let’s say you just bought a new car for $30,000 for 5 years with an interest rate of 5%. I know some people end up with higher interest rates, others with lower, I just figured 5% was a nice middle ground and you will end up with a payment of $567 a month.

Ding, ding, ding, are you seeing what I am seeing? Isn’t that the $500 a month that could have went to our mortgage to pay it off in 10 years instead of the now 15 years, huh. So now combining our examples, we now have 15 years left on our mortgage after refinancing to lower our term and interest rate. We have a 5 year car loan that we are going to just pay as agreed, no extra principle payments. The only thing I will add to this is to keep the car for 10 years. Yes you heard me right keep this car for 10 years means no car payment for 5 years after you paid it off. That’s $567 that can now go toward your mortgage.

Back to Mortgage….

Now we are 5 years later, your car is paid off. You are 5 years away from your ideal retirement age but have 10 years left on a 15 year mortgage. Well after 5 years your $157,568 mortgage, has a balance of $111,051. If we take $500 from what we used to pay on our car note, (leaving the $67 to pad our pockets a bit), and add it to our regular mortgage payment our mortgage will be paid off 42 months early. Wow we just shaved off 3 years and 6 months off of this mortgage. If we just threw up our hands and stopped right there we are only 1 year and 6 months away from our original goal. We could just work and extra 18 months, and achieve our goal without really changing our current lifestyle. Impressive huh.

But if I have made you see the light, and you are sitting with a piece of paper to run your own calculations, but now want to figure out how to not work the extra 18 months, there is an easy solution. Using our example, at the end of 10 years of payments which include the extra $500 a month during the last 5 years from the car payment you no longer have to pay. You will owe around $27,000 on your mortgage. If you are one of the ones who get a tax refund every year, and if that refund amount is around $1,000, build the habit of adding that to the mortgage principle every year. If you start that habit in the beginning when you first refinanced the loan that’s an extra $10,000 in principle and $2,500 in interest saved. Doing that alone without the extra $500 a month, takes you from a 15 year loan to a 13 year 10 months loan. Plus remember the extra $500 a month shaved 3 years and 6 months off the loan. So the house will be paid off by retirement and current lifestyle isn’t changed, meaning all raises, overtime pay, etc. is yours to keep. (Yearly extra payment calculator curtesy of calculator.net)

Wow, that was a lot of information, hope I didn’t lose you. But next is do you have credit card debt?

Credit Cards

As we have already proven in the last three sections, with 20 years left on a $200,000 mortgage and 10 years until you want to retire and a brand new $30,000 car, you will still be able to retire, without changing your lifestyle. Now if you have credit card debt. The best thing is to stop using them and just continue paying them down. Now this portion is where depending on the amount you owe, you can continue paying as agreed and/or also start adding any extra money you can find to the principle. Whether you switch to the night shift for the differential pay, work some extra overtime or holidays to get the money, the goal is to have no credit card debt by the time you retire. As federal employees we have the option of carrying over 240 hours of Annual Leave into the next year and if you accumulate your leave for your final year, which will be 204 hours, the government will write you a check for 448 hours of Annual Leave. In some cases that can equal $13,000 or more after taxes. That can be the money used to wipe out the rest of or any credit card debt still pending at the time or you can finally trade in that 10 year old car put that thirteen grand with it and walk off the lot with a paid for newer used car…just saying.

Now that we have gotten past the hard part, the last is fairly simple and a rough estimate will do. No need to be exact here, remember we are looking 10 years down the road but even if you are closer to retirement this will still help. Estimate how much you expect your federal pension to be. Many of us are in the 34% of your high three range. If you make $100,000 a year you expect to make $34,000 (remember we keep our health insurance but other withdrawals from your check will be going away like TSP contributions). If you will be receiving a social security supplement until you reach age 62, estimate what that will be a month. Usually that is estimated at half of your projected social security payment at age 62. Open an account at ssa.gov to see how much your estimated social security will be per month at age 62. So if the Social Security Administration estimate your income at $2,000 a month at 62 or $24,000 a year you have to decide if $58,000 a year ($34,000 + $24,000) will be enough to cover your living expenses plus fun money for those retiring at age 62. Or if you are retiring before age 62 and getting the supplement of $12,000 a year (1/2 of $24,000) as per this example, will $48,000 ($34,000 + $12,000) be enough? This isn’t even including the money you have saved in your TSP during your career.

Remember when you look at your expenses in retirement without a mortgage, car and credit cards. Don’t forget to include, homeowner taxes, insurance, food, car insurance, car/home repairs or upkeep, life insurance, car fuel, clothes. We often forget those items when we think of electricity, water and gas bills in the home. Plus add possible college tuition you think you may have that as well.

Thank you for sticking with me to the end of this article. I know I through a lot of things at you, but this is one subject that couldn’t be short and sweet. Until next time.

Ms. Smart