Why Run-of-the-Mill Retirement Planning Advice Doesn’t Work for Federal Employees

Image Contributor: Anthony Ricci

As a federal employee, you have spent years in your career and want a comfortable retirement. But it’s often tough to find advice in this area that fits your situation with government employment.

If you read the newspaper or surf the web, chances are you have come across some articles with retirement advice. For many people, these insights can be quite helpful: catching up on retirement savings, estimating how much retirement income that you will need, deciding when to retire, and so on.

But in many cases, these insights don’t matter as much to federal government employees. In fact, a great deal of the advice may not apply at all. Why?

Federal Employees Need Tailored Retirement Guidance

As a government employee, you need information that covers your unique federal employee benefits and they fit into your financial picture. One big question: how you can optimize your employee benefits for a comfortable and secure retirement after you separate from service?

It’s important to be able to answer questions such as this, so that you can make confident and well-informed decisions for your family and yourself.

Here’s a few reasons why generic retirement planning advice doesn’t cut it for federal employees – and, instead, how tailored guidance can make a world of difference for their unique employee benefit programs.

1. Different Benefits Programs from the Private Sector

Federal employees have far different retirement benefits from those of private-sector employees. Depending on when they came into service, civil federal employees are grouped into two systems:

• the Civil Service Retirement System, also known as CSRS, and
• the modernized Federal Employees’ Retirement System, commonly referred to as FERS.

In CSRS, U.S. government employees receive a large pension annuity that has accumulated from earnings from their base pay over their federal careers. With FERS, they have Social Security, a smaller pension annuity, and the Thrift Savings Plan (401(k) like savings plan for the federal public sector).

CSRS employees have the option to participate in the TSP. However, they aren’t automatically enrolled in it.

If you are part of the uniformed services (military), you might be part of the CSRS system or the Blended Retirement System. It depends upon when you enlisted and the number of years of service that you have put in.

All of these programs have unique benefits, including defined-benefit pension income. In the private sector, the vast majority of companies use defined-contribution plans like the 401(k) plan. The Thrift Savings Plan is the government’s version of a 401(k) plan. During your years of accumulating assets, it works similarly to a 401(k) plan in many respects.

2. Treated Differently Under Social Security

Social Security rules don’t apply equally to federal employees as they do to private-sector employees.

Depending on your specific federal retirement system, a part of federal law called the Windfall Elimination Provision might apply to you. The time of your service impacts whether you might receive Social Security benefits or not.

From that standpoint, it’s easy to see why the one-size-fits-all advice of when to take your Social Security benefit might not apply to you. Federal employees may also be eligible for earlier retirement than private-sector workers, who often retire at the ages of 62 to 65 or older.

Hence, the advice surrounding Social Security as the breaking point for your entry into retirement might not apply. Some federal employees can retire after they have put in 30 years of service. For example, someone who started working for Uncle Sam when they were 25 years old could retire at age 55.

Federal employees may want to coordinate their Social Security decisions with how they will tap their other retirement benefits. For example, say someone is in their late 50s and is covered under the FERS system. They have enough creditable service where they qualify for a FERS immediate retirement (a.k.a. a regular or voluntary retirement under FERS).

Our federal employee wants to bridge the gap from when they retire to when they take Social Security. However, the minimum age for Social Security is 62. Even then, they are thinking about taking Social Security later so that the benefit has more time to accrue.

Assuming other conditions are met, our federal employee may want to look into the FERS supplement. This is a supplement that is designed to help certain FERS employees cover the gap between when they separate from service and later claim Social Security. Many federal employees haven’t heard of this, and it’s formally called a Special Retirement Supplement.

That is without talking about situations where our federal employee may maximize their benefit by claiming well beyond the minimum age of 62. The point? Generic retirement planning advice just doesn’t cut it in this case.

3. Making Assumptions about Your Savings Progress

Most retirement articles assume the reader needs to play catch up with retirement savings, which might not apply to federal employees. And you know what they say about assumptions!

In retirement, one of the most crucial outcomes is income. How much income will you receive each month? How much income does it take to pay for your preferred lifestyle? This isn’t a question that having a certain amount in overall retirement savings will answer in itself.

Since most federal employees fall under the FERS system, they will probably have two sources of guaranteed income: their pension and their Social Security benefits. If they are eligible, they might take advantage of the FERS supplemental benefit, as discussed earlier.

Just those two benefits will give some reliable cash-flow each month. Most private-sector workers are in a different boat. They will likely rely on Social Security — only one predictable monthly income stream — and will have to figure out how to make up income gaps with their investments.

Back to our discussion of you and other federal employees. The pension and Social Security are sources of guaranteed income that will be paid out each month. So, the question of how much retirement savings a federal employee has accumulated isn’t as important as how much income.

What’s more, federal employees have some limits on the distribution rules for their TSP accounts. However, these limits aren’t as restrictive as they were in years before.

The TSP Modernization Act gave more flexibility in how you can withdraw your money and in frequency of withdrawals. But there are still some rules for distributions that should be kept in mind. Again, it’s another example of how cookie-cutter retirement advice doesn’t serve federal employees well.

4. Other Benefits That Affect Your Retirement Benefits

Federal employees may choose to continue FEGLI coverage post-retirement. However, the premiums rise by a lot. In fact, the monthly premium for FEGLI increases by more than a whopping 4,500% from age 30 to age 70.

On the other hand, private-sector employees often don’t have group life insurance in post-retirement. One exception is they are a key employee at their workplace, and they have extended permanent life insurance coverage in a group carve-out plan.

If a federal employee takes advantage of their FEHB benefits, then possibly continues them into retirement, that can affect their pension income. It can shave off some of the income they might receive from their pension annuity.

Those who are age 65 and over must also enroll in Medicare Part A in order to avoid a penalty. That is, unless they are still working.

As long as someone is still working, there is no requirement to enroll in Medicare. But once they retire they must either do so or face a penalty.

Some FEHB plans offer a coordination of benefits feature designed to complement Medicare coverage. That being said, in many cases the FEHB coverage will overlap Medicare in some areas. These are all things for federal employees to think about with their benefits options.

Looking for Personalized Guidance That Is Right for You

Generic retirement advice doesn’t address these unique situations for federal employees at all. You need a guide who understands your federal benefits and who can educate you on their inner-workings.

That way you can make informed, confident decisions for your family. Consider requesting a federal benefits analysis from a benefits-knowledgeable financial professional. This can help you with important decisions of when and whether to retire. It can be the subject of an entire article, but someone who emphasizes the educational aspect of your benefits, and you understanding them, is a good starting point.

Other telltale signs that someone is experienced to guide you through your federal benefits is through holding a professional designation suited just for federal employee benefits.

The Chartered Federal Employee Benefit Consultant℠ designation is one such mark. Feel free to ask us for more information about this on our contact page, if it would help you.

Now, let’s go back to you. If you are looking for a financial advisor or an organization that understands federal benefits, check out our “Find a Financial Professional” section. Many financial professionals on the SafeMoney.com platform work with federal employees for retirement. If you would like a personal referral, feel free to call us at (877) 476.9723 for more information.