Although, as a federal employee, you should begin planning for retirement years before you hand in your application, the year before retirement is critical to set yourself up for the transition. This period is essential since you’ll have limited time to review your finances and make decisions that will affect the rest of your life. So, before you cut into your retirement cake, make sure you allocate some time to the following task:
1. Consider Working With A Professional
Failing to have a retirement plan is one of the most common reasons federal retirees encounter problems in their retirement, which is why I encourage everyone to consider working with a financial planner, especially federal employees approaching retirement. Now, although your agency is a great resource and will likely provide you with seminars and counseling, they will not create an individualized financial plan for you. So, as you begin to prepare for retirement, consider working with a qualified financial planner. I highly recommend considering a fee-only Certified Financial Planner (CFP) since creating financial plans is our specialty.
2. Define Your Retirement Goals
An essential part of retirement planning is defining your goals. If you have already established your goals, review them to ensure they are still relevant and nothing significant has changed. If you haven’t taken the time to write down what you want this next chapter of life to look like, grab a beer or a cup of coffee, and let yourself dream about a life that excites you. Everyone is going to have different goals, but here are a few questions you should answer:
- When do you want to retire and why?
- Where do you want to live?
- What will life look like? Will you have a second career? If so, you may need to learn new skills or build a new network? If you’re going to live the retired life, what will your day-to-day look like? Will the cost of your lifestyle change? Do you have any hobbies? Will you volunteer?
People often don’t realize how much of their identity is tied to their careers. So, although you may be looking forward to sailing into the sunset, make sure you have a plan for what this new stage of life will look like.
3. Confirm Retirement Eligibility Date
Once you have established your retirement goals, meet with your HR to confirm that the year, month, and day will meet the minimum age and service requirements. This will also be a good time to ask for a pension estimate, which you’ll use when projecting your retirement income (more on this later).
4. Find Out Where You’re At Financially
If you work with a financial planner, then this is something the two of you will likely address as you create your financial plan. But, if you decide to go it alone, then you should at the very least create a budget and a net worth statement. These two financial statements will give you a good idea of where you stand financially.
Budget: An accurate budget is a critical tool in planning your retirement because it shows you whether your projected retirement income will be adequate to support your lifestyle. When creating your budget, make sure to include two sections, one for your current expenses and the other for your expenses in retirement. The two sections will be identical for many, but there can be a significant difference for some. Here are a few apps that can help you track your income and expenses: Mint, Personal Capital, and YNAB.
Net Worth Statement: You need a net worth statement or balance sheet to know where you stand financially. This statement shows you what you own and what you owe and provides the additional clarity that a budget lacks. You can learn more about creating a net worth statement here.
5. Tighten Up Your Finances
Before you retire, you should tighten up any financial loose ends that add additional risk to your financial future. Taking the time to establish or replenish your emergency fund and reduce or eliminate any high-interest debt will position your finances to support the retirement you hope to have rather than hinder it.
Your Emergency Fund
Although you’ll receive your last paycheck and a lump sum payment for annual leave, usually within the first few weeks after your retirement, it can take 3-6 months to receive your first regular pension payment. So having an emergency fund is especially important during your transition from federal employee to retiree.
How much should you have in your emergency fund? The short answer is 3-6 months’ worth of non-discretionary living expenses. The long answer is, it depends on your situation; some factors include your family’s unique needs (health or lifestyle) and your risk tolerance (what amount will help you sleep at night?). Because of the uncertainty surrounding when you’ll receive your first pension payment, I’d say lean toward the more conservative end of the rule of thumb and save six months’ worth of living expenses. For more tips on creating your emergency fund, read this article.
Paydown High-Interest Debt
Now when it comes to managing debt, I don’t mean all debt needs to be eliminated. If your budget shows that you can manage some low-interest debt, it shouldn’t be an issue going into retirement. The debt you should be most concerned with is high-interest debt (think credit cards). If you have high-interest debt, one effective way of tackling it is by using a payment strategy often referred to as the debt avalanche strategy. This method priorities the credit card with the highest interest rate. If you want to learn more about this strategy, read this article
Although the TSP loan isn’t high-interest debt, an important point to note is that if you leave federal service with an outstanding TSP loan, you’ll need to pay the entire outstanding balance back within 90 days. If you don’t repay the loan within the required period, the TSP will declare a taxable distribution, meaning the loan will be treated as taxable income, and early withdrawal penalties may apply. If you want to learn more about the TSP withdrawal rules, read this article.
6. Review Survivor Annuity Benefits
Federal employees within one year of retirement should review and understand the FERS survivor annuity benefit options, such as:
- The type of survivor annuity elections that can be made, such as for a current spouse, a former spouse, or for an insurable interest.
- Eligibility requirements for beneficiaries.
- The cost and the amount of the survivor benefits.
- How a court-ordered can affect the survivor benefit.
- The timeline for making any changes to the survivor benefit election and the associated cost.
Note: Read more about the survivor benefit here.
7. Understand the FERS Annuity Supplement
Although federal employees retiring before age 62 won’t be eligible for Social Security, they might be eligible for the FERS Supplement. The FERS Supplement or Special Retirement Supplement (SRS) is paid in addition to your pension and is available to certain federal employees who retire before age 62. To be eligible for the SRS, you must be under age 62 and eligible for immediate unreduced retirement. To learn more about the FERS Supplement, read this article.
8. Decide On A Social Security Benefit Claiming Strategy
All FERS retirees will be eligible to receive Social Security retirement benefits at age 62. However, if benefits are claimed at 62, the benefit will be permanently reduced. The earliest age for an unreduced Social Security retirement benefit is at your full retirement age or FRA, which is between ages 65 and 67 and depends on your year of birth. Many federal employees are also aware that if they delay their Social Security benefits until age 70, the benefit will be permanently increased by 24 to 32 percent.
So, the million-dollar question becomes: What is the best age to start receiving Social Security benefits? And the answer is everyone’s least favorite “it depends.” It depends on two primary factors: (1) your health; and (2) your retirement income needs. Therefore, you’ll have to weigh whether you believe you’ll live long enough to recoup the Social Security income you forgone and whether you can sustain your desired standard of living without your Social Security benefits and, if so, for how long?
Choosing the optimal Social Security claiming strategy can be complex and involve many moving parts, including tax planning considerations. So, it is usually best to meet with a qualified financial planner to develop a strategy that meets your unique needs.
9. Know The Medicare Rules
First, Medicare is optional, and there is no requirement to enroll (unless you have Tricare). However, there are some penalties if you don’t enroll when initially eligible and later decide to do so. The initial enrollment period begins three months before the month you turn 65, the month of your birthday, and the three months after.
If you wait 12 months or more after first becoming eligible, your Part B premium will go up 10 percent for every 12-month period that you could have had Part B but didn’t take it. You will pay the extra 10 percent for as long as you have Part B. This penalty only applies if you were not an active federal employee during this period.
As an active federal employee, you can delay your Part B decision beyond the age of 65 with no penalty if you are enrolled in FEHB. Once you retire or drop FEHB, you have eight months to enroll in Part B without incurring the 10 percent penalty.
For those of you enrolled in TriCare, you’re required to enroll in Medicare Parts A and B to retain TRICARE at 65 (known as TriCare for Life). There is no monthly premium cost for TriCare for Life.
Since all FEHB Program plans are considered “creditable” prescription drug coverage, federal employees/retirees can enroll in Part D at any time without the usual penalty. The Medicare Part D “open season” is October 15 to December 7 of each year.
Note: You can read more about Medicare for federal employees here.
10. Estimate Your Retirement Income
Once you have your budget and some tentative retirement dates, your next task is to estimate your retirement income by requesting a pension estimate from HR, obtaining your Social Security benefit estimate, and selecting a Thrift Savings Plan (TSP) distribution strategy.
Whether you get a pension estimate from HR or you calculate your pension, make sure your estimate includes all the deductions applicable to you. You can learn more about calculating your net pension here.
As previously mentioned, if you plan on retiring before age 62, you won’t be eligible for Social Security benefits but may be eligible for the FERS Supplement. Whether you will be receiving the FERS Supplement or Social Security, you’ll need your Social Security benefit estimate. You can obtain your estimate by creating an online Social Security account here.
After you have your pension and Social Security (or Supplement) estimates, you can compare this number to your budget to get an idea of whether the two sources of income will adequately support your retirement lifestyle; chances are they won’t, which is why you have the TSP.
Deciding which TSP distribution strategy is right for you is beyond the scope of this article, but a good rule of thumb is that 4 percent of your TSP should be enough to fill the annual income gap left from your other sources of income.
For example, if Bob adds up his pension and Social Security benefits and finds that he needs his TSP to provide $24,000 a year of additional income, then Bob will need to have a TSP balance of at least $600,000 (24,000/.04=$600,000). Again, this is just one way of deciding how to distribute your TSP in retirement, and I’d recommend discussing any potential strategy with a Certified Financial Planner.
11. Know The FEHB And FEGLI Retirement Rules
One of the reasons it’s important to start planning your retirement at least five years out is because you must be enrolled in both the Federal Employees Health Benefit (FEHB) and the Federal Employees’ Group Life Insurance (FEGLI) programs for five years prior to retirement to maintain both coverages.
Although most federal employees have no need for FEGLI in retirement, some may need coverage. If you want to continue your FEGLI into retirement, you must meet the following requirements:
- “You are entitled to retire on an immediate annuity under a retirement system for civilian employees;
- You have been insured for the five years of service immediately before the starting date of
your annuity, or for the full period(s) of service during which you were eligible to be insured if less than five years;
- You are enrolled in FEGLI on the date of retirement; and
- You have not converted to an individual policy.”
One of the best benefits you have as a federal employee is your FEHB coverage, and maintaining this coverage in retirement can help keep your medical cost from skyrocketing during a period when you’ll likely need more health care services. To carry your FEHB coverage into retirement, you must meet the following two rules:
I. The Five-Year Rule
The first hurdle you’ll have to pass to keep your coverage is the five-year rule, which requires that you have been continuously enrolled in the FEHB Program for the five consecutive years prior to your retirement or, since first eligible (if less than five years).
II. Immediate Annuity Requirement
The second requirement you’ll have is that you must retire with the eligibility for an immediate annuity (aka pension) or under the Minimum Retirement Age (MRA) +10 retirement option. Keep in mind that if you retire under the MRA +10 option, your FEHB coverage will stop when you separate and will resume when your pension starts.
If you don’t meet the requirements to carry both programs into retirement, then you’ll have to decide whether postponing retirement is necessary.
12. TSP Checkup
The years immediately before and after retirement are often referred to as the fragile decade for your portfolio because of the disproportionate impact, your investment returns have on your retirement. Image retiring right before the 2008-2009 recession, when many nest eggs experienced 50 percent declines. Such a drastic hit right before or after retirement could have had a devastating effect on your retirement.
Because of this fragile period for your TSP, it’s critical to ensure that your allocation (the funds you pick inside your account) aligns with your goals, risk tolerance, and shorter time horizon. For instance, having your TSP invested in all stock funds (C, S, and I) one year before retirement is inappropriate for most, and a diversified portfolio that includes a mix of stock funds and bonds (G & F) is usually more appropriate.
Generally, the closer you get to your retirement date, the more conservative you want to become with at least a portion of your portfolio. In fact, I encourage most of my clients to have at least a year’s worth of expenses or more in the G fund, cash, or certificates of deposits. This cushion can be instrumental when riding out any stock market turbulence.
13. Review Official Personnel File
Last but certainly not least, every federal employee should check their Official Personnel Folder (OPF) for errors. Since correcting, mistakes can take time, don’t wait until right before retirement to address any discrepancies. When reviewing your OPF, take note of the beginning and ending dates for each period of service that will be used to calculate your benefits; if you had any breaks in service, ensure those dates are correct, and if you have bought any military service back, make sure it’s documented correctly (learn more about buying back military time here).
We’ve all heard the Benjamin Franklin quote, “If you fail to plan, you plan to fail,” and that certainly rings true when it comes to your retirement. Many of the common issues that plague retirements can be avoided by addressing the items presented in this article. So, take charge of your future to ensure you have the next chapter of life you deserve. And remember to consult with a qualified financial planner if you don’t feel confident in creating your financial plan.
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2023 Legislative Change Notice
The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.