Continuing my series on the Fed-Life Cycle, this segment will focus on what I call the “committed” fed career. You have made the decision to most likely stay until you qualify for full retirement from federal service. Even if you are not fully eligible, you will receive some or all of your federal retirement benefits under deferred or deferred retirement in the future. Typically, you will have about 15 years of federal service at this point.
“But Jen, if I made the decision to stay, doesn’t the pension system do the rest?
Not exactly. You still have a few choices to make to build a fulfilling retirement and not just to survive. Here are some important planning strategies for making the most of your remaining years of service.
1. Understand your pension formula
For this article, I’ll assume you’re in FERS (not Law Enforcement or Special Provisions).
|Under 62 at the time of retirement or separation OR 62 and over with less than 20 years of service||1% of your highest average salary for each year of service|
|62 or older at separation with 20 or more years of service||1.1% of your High-3 average salary for each year of service|
Some important points about these formulas:
- Your years of service are calculated based on your pension service calculation date (RSCD). See point 2 below to understand how this date works.
- Sick leave will be converted to years and months and will be added to your overall service time – see point 3 below.
- Don’t underestimate the benefits of 62 years with 20 years of service! Once you know the long-term impact on your retirement, it’s very unlikely you’ll leave before age 62 with 20 years of service. It can be the difference between surviving and thriving!
2. Know your retirement eligibility rules
The most important date for you and your retirement plan is your “retirement service calculation date (RSCD)”. This is the date from which the OPM will determine both your eligibility and the calculation of the FERS or CSRS pension. I often meet people who think that because they received a credit for vacation purposes, it also counts for retirement. Sometimes it does, but often not without some action on your part. For example, if you had military service time, temporary time, Peace Corps, or VISTA service time, you should make sure you get credit. if you are eligible. Another situation I have seen is that of an employee who was an entrepreneur before entering government. Sometimes an agency will give leave credit, but not retirement credit. Sorting out this process can take months or even years. Changing agencies or taking a break in service can also impact your DSCP. Don’t wait until the last minute to be sure your RSCD is correct!
3. Carefully manage your sick and annual leave
As I wrote in point one, sick leave matters! When you retire from federal service under regular immediate retirement, your annual leave is paid in a lump sum. However, your sick leave is converted into years and months of service and added to the pension calculation. There are limits to the number of vacation days that can be carried over each year, but there are no limit on sick leave! In summary, you can be paid on your accumulated sick leave for the rest of your life in the form of a higher pension! It is also important to note that you are not paid for sick days if they are less than 30 days. Don’t retire leaving 28 sick days on the table – work a little longer to get that full month!
4. FEGLI Life Insurance – NOW is the time to plan ahead!
That’s the perk I hear all the time – “I wish I knew that.” You probably know that your FEGLI life insurance will get more expensive over time, but do you know how much more? And did you also know that if you’re healthy enough, you can probably get the same coverage for a lower overall cost by being proactive in those years? For example, if you have Option B coverage at 5 times your salary, the cost will double approximately every 5 years once you reach your 50s. I saw the feds save thousands of dollars in life insurance premiums by being proactive in these years of commitment.
Apart from FEGLI life insurance, there is the concept known as pension maximization. You may be told that there are ways to avoid the future cost of the survivor benefit on your pension by using life insurance. I have yet to find a scenario where funding a permanent life insurance policy will provide the same future benefits as a guaranteed survivor pension. Depending on the date of death of the annuitant (which we cannot predict), a policy may require a death benefit of millions of dollars. My advice is to be very careful before committing to such a strategy.
5. Assess long-term care options
Not everyone needs long term care insurance. However, the time to analyze your situation and decide if it makes sense to purchase coverage is usually at this time. After age 60, long-term care becomes very expensive. It’s not a fun conversation, but it’s important. A major long-term care event can wipe out decades of savings in a very short time. For many retirees, this is the biggest financial risk in retirement.
6. MYSM – Make sure you’re MAX
Every year is a big year with TSP – but these years are often when employees make one of the biggest mistakes – they get TOO conservative with their TSP allowances!
When thinking about your allocation, remember that the TSP is your longer-term money. The goal with TSP is to have it for the rest of your life. Depending on when you retire, it could be over 20 or even 30 years. Your TSP will most likely be where you track and hopefully stay ahead of rising inflation over the long term. Finding the right asset allocation for your risk tolerance and goals is key to maximizing the TSP. Additionally, recent years are often the years when the Feds are most likely to fully fund their TSPs to IRS limits.
7. Invest outside of the TSP
Accumulating “medium-term money” can improve your quality of life in retirement. It also gives you a source of funds that will be taxed at capital gains rates versus ordinary tax rates. This is what we call tax diversification.
8. Invest in YOU
Leverage “mental capital”. Ben Franklin once wrote, “An investment in knowledge always pays the best interest.
Adding to your job skills is a good strategy. Here are some resources we know of:
- Check with your agency’s director of learning (human resources department) to find out what funds are set aside for employee training.
- The GSA provides a number of training courses that feds can enroll in either through their agencies or on their own.
- OPM offers course options (these are mostly paid for by the agency, due to costs).
- The Harvard Kennedy School has picks the Feds can attend as well.
In summary, after 15 years of government service, it might be tempting to think that things will be as they are when it comes to retirement. However, by being proactive in planning, you will be much less likely to be surprised when it comes time to submit that retirement application. Remember that the goal is not simply to survive retirement, but rather to thrive! With proper planning, including following the steps I’ve outlined in this series of articles, you’ll be set to experience a retirement beyond your wildest dreams!
Jennifer Meyer, CFP®, AIF®, ChFEBC℠ has over 20 years of experience, many of which work specifically with Feds. Growing up in a family of federal employees, she takes great pride in serving the federal community. You can read additional articles for Feds by Jennifer at Serve those who serve.
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