With the average life expectancy for Americans continuing to rise, a concern for today‚Äôs retirees is making their nest eggs last longer. Longevity risk‚Äďthe chance you will outlive your savings‚Äďmay be the greatest risk federal retirees face today.¬†Developing a sound financial plan is essential to ensure your ‚Äúsavings well‚ÄĚ does not run dry too soon. The federal retirement system is both unique and complex for its 2.8 million current employees. This system includes the U.S. Postal Service, a quasi-governmental agency that employs the largest percentage of the civilian federal workforce.1 For optimal results, employees should begin planning for their retirement up to 10 years prior to their planned retirement date. It is imperative that federal employees understand their benefits and how each piece fits into their financial puzzle.
It is imperative that federal employees understand their benefits and how each piece fits into their financial puzzle.Getty Images
All federal employees hired before January 1, 1984, are a part of the Civil Service Retirement System (CSRS). Those hired after this date comprise the Federal Employee Retirement System (FERS), a hybrid retirement system including Social Security and a tax-favored savings plan.¬†Approximately 94% of the current federal workforce are FERS employees.1 Most federal employees are eligible for full retirement benefits between ages 55 and 57, with 30 years of service.1¬†
Federal special group employees, such as air traffic controllers, federal law enforcement officers, or firefighters, pay an extra ¬Ĺ% salary deduction and receive an enhanced retirement benefit. They are also eligible for full retirement at age 50 and 20 years of service.2 All federal employees are eligible to participate in the federally defined contribution plan called TSP (Thrift Savings Plan), which is similar to a 401(k) plan. The TSP contains five individual and life-cycle funds that allocate investments based on a proposed retirement date. While TSP is limited in its available investment options, it does offer a low-cost way for government workers to¬†save efficiently for retirement. CSRS employees are not eligible to receive TSP matching funds, while FERS employees (hired after January 1, 1984) are eligible for matching funds, up to 5% annually. The TSP contribution limit for employee deferrals will increase to $19,000 in 2019, while catch-up contributions will remain at $6,000.¬†
Employees are eligible to begin catch-up contributions at age 50. They should expect to contribute the maximum amount of $19,000 for the year to the TSP or to an equivalent tax-deferred employer plan, such as a private sector 401(k) or nonprofit 403(b) employer plan.3 A new catch-up contribution election must be made each calendar year. Matching contributions are not applied to catch-up contributions.4
All employees have the option to participate in either (or both) a TSP or Roth TSP, up to their contribution limit. However, all government matching funds are deposited into the traditional TSP employee accounts. A Roth TSP is similar to a Roth 401(k), not a Roth IRA, and there are no income limits for Roth TSP contributions. These contributions could also provide an enhanced opportunity to create tax-free funds to supplement future retirement income and maintain the lowest possible tax bracket. Employees should contribute to the Roth TSP for several years prior to retirement to accrue enough funds to effectively reduce higher taxation during retirement. Those retiring with full benefits may withdraw traditional TSP funds before age 59¬Ĺ without incurring a 10% penalty. These investments should be discussed with a financial advisor.
The Federal Employee Health Benefit (FEHB) insurance program enables all employees to keep their current health plan or select an alternative plan during the annual open season. Employees who retain FEHB coverage their last five years of federal employment may continue their coverage throughout their retirement. The federal government will continue to pay the same percentage of premiums as during employment. The open season is also available to federal retirees just as when they were working. Most FEHB plans complement Medicare benefits to provide comprehensive coverage for allowable medical expenses, in addition to prescription coverage. Retirees with Medicare should compare their FEHB plan cost annually and consider a plan with reduced premiums. The federal employee and retiree may choose various dental and vision plans, which may also be changed or canceled during the annual federal benefits open season.
The Federal Employee Group Life Insurance (FEGLI) provides basic life insurance coverage to federal employees equal to their salary, plus an additional $2,000.* USPS employees are not charged for basic coverage, and all other federal employees pay a reduced premium. Employees have the option to increase their life insurance coverage by paying additional premiums. FEGLI is a five-year banded-term insurance program, with premiums increasing significantly after age 45.¬†
As illustrated below, an employee retiring at age 57 with $100,000 optional FEGLI coverage will see their premiums increase from $43.50 per month at age 57 to $572.20 per month at age 80 and over: 5
It is substantially more cost-effective for federal employees to lock in term or permanent coverage outside of FEGLI before age 45. These options should be discussed with their financial advisor. Some employees nearing retirement may not need life insurance as they did earlier in their career. They may no longer have a mortgage, and/or their children are now on their own. Such employees should consider reducing their FEGLI in the years approaching retirement.¬†
Survivor annuity benefits are available for spouses of retirees and can cost them throughout their retirement years. The cost of the spousal survival annuity only stops if the spouse predeceases the federal annuitant, divorce occurs, or the federal annuitant dies. Employees should begin comparing the various options and subsequent costs of survivor benefits several years prior to planned retirement. The cost for survivor annuity benefits becomes very expensive over the years, which is why employees should seriously consider more cost-effective strategies (i.e., life insurance).¬†¬†¬†¬†
Many retirees are not prepared for the costs associated with long-term or nursing home care. Employees eligible for the FEHB program may apply for the Federal Long-Term Care Insurance Program (FLTCIP) at any time with full underwriting.6 The FLTCIP does not have an annual open enrollment season and currently does not have a date scheduled for one. Premiums are much less for those individuals who are younger, healthier, and not yet retired. Affordable long-term care options may also be available in coordination with life insurance and annuity options. They should also be discussed with a financial advisor.
Federal employees work many years while investing money for their retirement. Every employee, and their families, should enjoy the retirement that they have worked so hard for. As a first step, employees should begin meeting with an advisor who focuses on federal retirement up to 10 years prior to their own retirement. The advisor will be able to recommend strategies unique to current and future retirees.¬†
*‚ÄúRounded up‚ÄĚ should be correct, as it is not an additional $2,000. Example: If an employee has a salary of $88,650, their basic life insurance would be (rounded to $90,000); not $90,650 which would be an additional $2,000.
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