Monday, 27 May 2019

Longevity Risk And The Federal Retiree – Forbes

With the average life expectancy for Americans continuing to rise, a concern for today’s retirees is making their nest eggs last longer. Longevity risk–the chance you will outlive your savings–may be the greatest risk federal retirees face today. Developing a sound financial plan is essential to ensure your “savings well” 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.

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 ½% 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 59½ 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