If you’re a government employee, the book on retirement planning is totally different for you. Unlike most private sector employees, you have a very powerful benefit in your pension plan (aka FERS annuity). This benefit provides a guaranteed income, which means you’re not dependent solely upon your investments and Social Security to create a retirement income stream. It also means some of the conventional wisdom gets thrown out the window. Let’s dive into some important federal employee retirement planning strategies.
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1. Pensions Allow for Less Reliance on Investments
Finding a private sector employee with a pension is rare, but federal employees enjoy a pension along with more traditional retirement benefits like Social Security and investments through Thrift Savings Plans (TSP).
The addition of a pension creates what advisors sometimes call a “three-legged stool,” or retirement income from three different sources, each personally fine-tuned to maximize value. Since pensions aren’t often part of the plan for private sector workers, they have to position their investments differently than their public sector counterparts. With a pension to fall back on, however, federal workers with an appetite for risk can invest in a more aggressive portfolio, even when retirement is within sight. A market downturn might hurt your TSP, but your pension and Social Security will always be dependable.
2. Planning for More Retirement Income than Anticipated
Too much money in retirement sounds like a good problem to have, but the goal of retirement planning is for even spending over time so that we aren’t needlessly subjecting our finite incomes to tax. Private sector workers without a pension usually won’t have to worry about this problem, but the presence of a pension does create some unique scenarios for federal retirees.
With three potential sources of retirement income, federal workers may find their income is higher than anticipated. This may cause you to underestimate your tax burden or improperly utilize benefits like Social Security. The best retirement plans, however, have a Goldilocks range where income and taxes are most efficiently applied. Yes, too much retirement income is a far better problem to have than not enough retirement income, but any unexpected increase or decrease will cause some disruption to your plan.
3. Tax Planning is Even More Crucial for Federal Employees
Tax planning is always an important part of retirement planning. When incomes are fixed, we need to make sure our tax burden is reduced as much as possible. Federal workers must be even more mindful of taxes since they’ll be hit from multiple directions.
While you may often hear that it’s important to maximize contributions to accounts like your 404(k), in some cases this may not be the best course of action. Instead, consider complimenting your 401(k) with other vehicles that could lower your tax obligation.
Money in Roth TSPs and Roth IRAs, for instance, grows tax free if done within the rules and is not subject to tax when withdrawn. Every dollar you convert from a traditional IRA to a Roth IRA becomes taxable income, but then investment earnings grow free of capital gains taxes. Then, once you are at least 59 1/2, you can take distributions tax-free. The tax-free returns of a Roth can help fill income gaps so taxable sources of retirement income can remain untapped. Tax awareness is key for federal employees.
4. Consider Health and Life Insurance
Maintaining health insurance in retirement is a given. For some individuals, there is also a continued need for life insurance. Once again, federal workers have access to a different system than retirees in the private sector. If you worked for the government, you can carry your Federal Employee Health Benefits (FEHB) plan into retirement with you. But now you’ll be charged a monthly premium which will be paid with after-tax dollars.
Federal employees don’t have to keep their FEHB plan in retirement, but there may be a gap before reaching Medicare eligibility. Additionally, federal workers can decide to keep their Federal Employee Group Life Insurance (FEGLI) or part ways for a private insurer. FEGLI has different coverage options to consider and cannot deny for pre-existing conditions, however, coverage costs will eventually outpace those of private life insurance.
5. Develop a Holistic Approach to Retirement Planning
The retirement benefits offered by the federal government provide a solid foundation for a successful retirement. But like most government programs, the process is complex, full of jargon, and often requires assistance to translate. Financial advisors can help make sense of these benefits, but you’ll want to find someone with specific experience dealing with the government. Strategies for federal workers may seem counterintuitive to someone who only deals with private sector clients.
Seek out an advisor who can not only help decipher the details of your benefits but also sees the big picture. Retirement planning is all about planning for today AND tomorrow. Your plan should account for both short-term and long-term goals. Setting realistic goals and seeking the help of a financial advisor experienced with the complexities of retirement planning for federal workers can help you to work toward your retirement vision.
Good Life Financial Advisors of NOVA Specializes in Federal Retirement Planning
If you have any questions about these federal employee retirement planning strategies, a financial advisor from Good Life Financial Advisors of NOVA can assist you. We specialize in working with federal employees, government contractors, and military personnel. Contact us today!