Leaving the Public Sector: Important Financial Considerations
Researching a potential career change can bring some exciting times; as well as a new salary and benefits, a change of environment can make a huge difference to our enjoyment in life. However, before deciding to leave the public sector, we recommend considering the financial implications carefully!
Short-Term
In the short-term, your main concerns are likely to be related to your pay. However, this doesn’t mean you should forget healthcare benefits, employer contribution, and retirement plans. Will your new employer offer a retirement plan? Will the cost of healthcare suddenly increase significantly?
Long-Term
Once you’ve compared these short-term considerations, what happens in the long-term? Despite suffering in recent years, public sector retirement benefits, for example, still exceed anything offered by the private sector. Once you consider the maximum match for a TSP and FERS, around 15% of your salary can actually be contributed by the government. Although you’ll get close with school systems and universities, the private sector just cannot compete when it comes to contributions.
Is overall compensation lower in the private sector? Well, you could research three different studies and find some very different answers. This being said, the disparity differs, according to a CBO study, depending on educational attainment.
As well as contributions, the retirement benefit itself needs to be assessed. With a TSP, you have something akin to a 403b or 401k plan which are both normally available with larger companies. With FERS, though, this is essentially a pension which keeps benefits fixed even if the stock market crashes. With a pension, there are opportunities to shift the investment risk to the employer (as well as the risk of inflation being taken by the government because FERS has a cost-of-living adjustment). This is something you need to consider before making any big decisions because it’s much easier to meet retirement goals when a percentage of the risk has been transferred to the employer. We think it’s important to manage the risk of both poor investment performance and inflation.
FERS and TSP
What are you going to do with all FERS contributions? Assuming you have five years of experience with the government, a deferred annuity at retirement will be your main option. Although many will be able to request a refund, we advise you to remember the value of a pension. When making this decision, assess what income you could receive after re-investing the refund, assess what income you would get from the pension, and then decide on a strategy.
What are you going to do with your TSP investment? On a similar note, you won’t be able to make contributions (or take a loan) after leaving the public sector…but this doesn’t mean you can’t leave the funds where they are. In terms of investment, the TSP does have some low-cost options.
For many, they like to transfer (roll) the funds into an IRA or even a different employer retirement account. Before the rollover, make sure you pay off outstanding loans and assess potential plan expenses (you don’t want any nasty surprises later down the line!).
Summary
If you’re currently in the research phase of changing jobs, be sure to take your time and consider all of the financial implications carefully. By comparing the pros and cons of every option we’ve discussed, you’ll be able to decide whether or not it’s the right time to change. If you’re really motivated to make this change in your life, then you’ll know how to do so without a huge financial cost when all is said and done!
Benefits of TSP
There are several advantages to the Thrift Savings Plan for participants. The most basic part is that the federal government offers a contribution match for up to 5% of the employee’s annual income. These can be made in the form of automatic payroll deductions. TSP funds can be low-cost ways to save for retirement, especially with lifecycle funds tailored to a specific retirement date. You can also choose from traditional pre-tax contributions, which allow you to not have to pay income tax until retirement, or Roth TSPcontributions that allow you to pay the tax now and not worry about it at retirement. Both are good options, but consider talking to a TSP withdrawal expert before you make any decisions.
Difference between CSRS and FERS
TSP CSRS, or the Civil Service Retirement System, offers the Thrift Savings Plan as a supplement to your CSRS Annuity or military pay- as of January 1st, 2018, military employees also participate in a military TSP.
TSP and FERS, or Federal Employees’ Retirement System, makes your TSP one part of a three-part retirement plan. This also includes the FERS Basic Annuity and Social Security.
The difference between the FERS or CSRS Annuity and the TSP is that the annuity is based on your years of service, rather than how much you have contributed, and is also voluntary, as opposed to the annuity.
Regardless of which retirement system you qualify for, contributing to the Thrift Savings Plan is vital to your retirement, especially if you contribute early. TSP compound interest means that the earlier you start to make contributions, the better. However, if you did not start saving at an earlier point, committing to a steady and consistent contribution schedule will almost always produce positive results.
How does TSP work?
If you are a new federal employee, you most likely have an established account and were enrolled in a 3% payroll deduction. If you were hired before July 31st, 2010, you were not automatically enrolled in a TSP account and will need to create it yourself. For CSRS employees and members of the uniformed services, you must elect to contribute to the TSP. You are also not eligible for agency contributions.
You can elect to stop or change your contributions at any time. Check with your payroll office or agency to find out how to sign up for TSP. You may be required to use your agency or service’s electronic system, or you may have to submit Form TSP-1 (Form TSP-U-1 for uniformed services). The Thrift Savings Plan website has the forms available if your agency or service accepts them.
TSP funds
There are five core funds in the Thrift Savings Plan- four of them are index funds, which mean that they are exactly matched to a broad market index.
- G Fund (Government Securities Investment Fund)
- This fund does not invest in an index. The only fund that it is connected to is a nonmarketable treasury security issued for the TSP by the U.S. Lowest return and risk
- F Fund (Fixed Income Investment Index Fund)
- Matches the Barclays Capital U.S. Aggregate Bond Index. Slightly higher return and slightly higher risk.
- C Fund (Common Stock Index Investment Fund)
- Out of the three stock funds in the TSP, the C is considered the most conservative. It is connected to the Standard and Poor’s 500 Index, which has greater volatility than either the G or F funds.
- S Fund (Small Capitalization Stock Index Fund)
- This fund is connected to the Dow Jones U.S. Completion Total Stock Market Index, which is a total of 4,500 companies that fall outside of the S&P 500’s list. Potential for large growth, but also large losses.
- I Fund (International Stock Investment Fund)
- The only internationally invested fund. High risk, but potentially high reward.
There is another option for Thrift Savings Plan investment funds- the L funds. These are funds that actually invest in a variety of all the other funds and target a specific retirement date, initially investing in the more aggressive funds and slowly moving into the more stable bonds funds as retirement approaches.
How to change my TSP contribution
If you have not made a contribution election through your agency to start contributions or change the way your contributions work, there are a few steps:
- Ask your personnel or benefits office whether your agency or service handles enrollments
- Determine the amount you want to contribute and whether you want a Roth or Traditional TSP
- Return your completed TSP-1 or TSP-U-1 to your employer to get your payroll deductions set up. Your election should be effective no later than the first full pay period after your agency or service receives it.
Withdrawing from the TSP
You have several withdrawal options that you can choose from. Partial withdrawals are allowed in a single payment. You can also make a full withdrawal with any one or any combination of the following methods:
- A single (lump sum) payment
- A series of monthly payments
- A life annuity (Thrift Savings Plan Lifetime payment options).
A combination of any of these three full withdrawal options is called a “mixed withdrawal.” You can have the Thrift Savings Plan transfer all or part of any single payment or, in some cases, a series of monthly payments, to a traditional IRA or an eligible employer plan by completing the TSP-70 form. Payments to you can be deposited directly into your checking or savings account using electronic funds transfer (EFT).
Spouse’s Rights
If you are a married Thrift Savings Plan participant (even if you are separated from your spouse), spouses’ rights apply to annuity purchases. If you are a married FERS or uniformed services participant with a total account balance of more than $3,500 and you are making a full withdrawal of your account, your spouse is entitled by law to an annuity with a 50% survivor benefit, level payments, and no cash refund. If you choose any other withdrawal option or combination of options by which your entire account balance is not used to purchase this particular type of annuity, your spouse must sign the statement on your withdrawal form that waives his or her right to that annuity.
