Introduction to Financial Planning for Federal Employees
It’s never too early for Federal Employees to start financial planning for retirement. Federal employees have certain benefits that employees in other sectors do not. It helps to work with a financial planner who is familiar with these benefits, or you may run the risk of receiving poor planning advice.
Financial planning starts with a review or your investments, including your Thrift Savings Plan (TSP), brokerage and mutual fund accounts, assets and all banking and savings accounts, and includes evaluating expenses pre- and post-retirement. You also need to review all your accounts to ensure that proper beneficiary or Pay-on-Death (POD) designations are listed.
Your personalized plan will ultimately show you what your total income and expenses — are pre- and post-retirement — and will put things into proper perspective for you and your family. The goal is to first determine if your post-retirement income, from all sources, will be sufficient for you and your family to maintain the lifestyle you desire. If your calculations reveal a deficit – i.e., less money than you need – starting early will give you the time to make changes, pay off mortgages and save to achieve the appropriate level of post-retirement income.
Every plan is different because each individual has unique circumstances. You may have children who are still in college, parents who need your care and attention, a home mortgage, and an entire range of specific circumstances that differ from person to person and family to family. You, with the assistance of a competent and knowledgeable financial planner, are the only one who can effectively develop your own plan because you know yourself better than anyone else.
Federal Retirement Programs
Both the Civil Service Retirement System (CSRS) and the Federal Employees’ Retirement System (FERS) provide defined benefit pensions that are significantly different from the defined contribution plans (such as 401(k) plans) that are prevalent in the retirement plans of most private sector companies.
This means that your pension benefits do not depend on the performance of stocks or bonds. Rather, they are defined by your length of service and “high-three” years of salary.
Your federal pension must be taken in the form of an annuity. There is no lump-sum distribution option available in either the CSRS or FERS programs. Your CSRS or FERS annuity will last you the rest of your life; no more and no less. There is absolutely no risk of running out of money before you run out of time.
Your CSRS or FERS annuity comes with a cost-of-living adjustment (COLA)(see related article on COLAs). Most of the remaining private sector defined benefit plans do not have COLAs. CSRS retirees begin earning a full COLA (based on the Consumer Price Index for urban wage earners known as CPI-W) when they retire. The FERS COLA is not fully indexed to the CPI-W and may trail it by as much as one percentage point. Most FERS employees must wait until age 62 to begin earning a COLA, but there are exceptions for law enforcement officers, firefighters, retirees on disability, and air traffic controllers.
The Federal Employee Health Benefits Program
You and your financial planner should also be aware of the link between choosing a survivor benefit for your spouse and your spouse’s ability to continue enrollment in the Federal Employee Health Benefits Program (FEHB).
If you do not elect at least some level of survivor benefit and die before your spouse, your spouse will be ineligible to continue enrollment in the FEHB. There is a major exception for those federal employees who are married to another federal employee or retiree. If that is the case, your spouse will be entitled to FEHB benefits in his or her own right and will not require a survivor benefit to allow them to continue to be enrolled.
It is especially important for your financial planner to understand this FEHB/survivor benefit link, since otherwise your planner may try to sell you life insurance in lieu of your electing a survivor annuity for your spouse. This additional life insurance option is called “pension maximization insurance” and may make sense in some situations, but not if it excludes your spouse from FEHB coverage after your death.
Service Credit is a program that allows employees to make payments into the CSRS or FERS programs during the time when they either did not contribute to the Civil Service Retirement and Disability Fund, or for which they received a refund of their retirement contributions. In certain circumstances defined by law, employees may make service credit deposits or re-deposits in order to maximize their benefits upon retirement.
Thrift Savings Plan (TSP). Your financial planner should also be aware of your contributions to the Thrift Savings plan as another element of your retirement benefits in addition to your monthly annuity. (See article on TSP.)
Federal Ballpark Estimate. You can use the Federal Ballpark Estimate to automatically calculate estimates of future CSRS or FERS retirement benefits and TSP account balances. It will also let you know how well you are doing in meeting your savings goal.
Required Withdrawals from IRAs and Employer-Sponsored Retirement Programs.
You and your financial planner should be aware of withdrawal requirements from IRAs and “employer sponsored” retirement programs such as the Thrift Savings Plan (TSP) or 401(k)s when you turn 70 1/2:
Owners of traditional IRAs as well as TSP and 401(k) participants must start withdrawing from those accounts the year the plan participant turns age 70½ or April of the following year: This is the Required Minimum Distribution (RMD). There are two issues of importance here:
- If a TSP or 401(k) participant is still working, the withdrawal is not required. However, the IRA account holder must withdraw even if he or she is still working.
- If the individual elects to delay the first withdrawals until April 1 of the year following turning 70 1/2, he or she must take two withdrawals in that year.
- While the account holder is in his or her 70s, the Required Minimum Distribution (RMD) withdrawal is in the 4% to 5% range of the account values on December 31 of the previous year. The penalty for not withdrawing or withdrawing incorrectly is 50% of the amount that should have been withdrawn.
- The values of all IRA accounts can be accumulated, and the withdrawal can be taken from only one of the IRA accounts, if desired. This is not so, however, with the TSP and 401(k) plans. The necessary total withdrawal for TSP and 401(k) plans is calculated on the total value of all those plans, but the withdrawals must come from each plan.
- The TSP will only allow one partial withdrawal in a lifetime. Therefore, the first required withdrawal could come from the TSP; but thereafter, the required withdrawal could not be taken in a lump sum TSP.
- Roth IRA’s have no withdrawal requirements; however, the Roth TSP does require a withdrawal. The Roth TSP, however, could be rolled into a Roth IRA to solve that issue — with no penalties, fees or taxes.
When Federal Employees Near Retirement
There are specific government Office of Personnel Management website sections dealing with the following financial planning matters. Please review them for further information. You should begin planning several years before the date you have set for retirement so that you will know what is required to continue certain benefits into retirement.
- If you are within five years of your retirement date. https://www.opm.gov/retirement-services/csrs-information/planning-and-applying/#url=Five-Years-or-Less
- If you are within one year of retirement. https://www.opm.gov/retirement-services/csrs-information/planning-and-applying/#url=One-Year-Away
- If you are within 6 months of retirement. https://www.opm.gov/retirement-services/csrs-information/planning-and-applying/#url=Within-Months
- Applying for Retirement. https://www.opm.gov/retirement-services/csrs-information/planning-and-applying/#url=Apply
- Refund of Retirement Contributions. https://www.opm.gov/retirement-services/csrs-information/planning-and-applying/#url=Refund-of-Contributions
- Inquire about your voluntary contributions options before your retire. https://www.opm.gov/retirement-services/csrs-information/planning-and-applying/#url=Voluntary-Contributions