Joining the federal workforce is an exciting milestone for many individuals seeking meaningful and rewarding careers. Whether you’re a recent graduate, a career changer, or an experienced professional, working for the federal government offers an array of benefits.
While most new Feds get guidance on enrolling in FEHB and will automatically contribute to the FERS pension, there are a few critical areas that new Feds need to be aware of to set themselves up for financial success. So, in this article, we’ll explore some of the most important benefits and tasks for new federal employees.
1. Establish Your Emergency Account
While this may sound simple or dull, it’s a must-have for financial success. For example, federal employees who don’t have an emergency fund and experience a large, unexpected expense may be forced to withdraw from their TSP, which could result in penalties and a substantial tax bill.
How much should you save in your emergency fund? The short answer is three to six months’ worth of non-discretionary living expenses. The long answer is that it depends on your situation. Some factors include your family’s unique needs, job security, and risk tolerance (what amount will help you sleep at night?), but saving between three and six months of expenses is a reasonable starting point.
Note: Keep your emergency fund in an easily accessible account (i.e., savings or money market accounts). You can find tips on building an emergency fund here.
2. Protect Yourself Against Catastrophes
While an emergency fund can protect against smaller expenses, insurance can protect you against financial ruin. Hence, reviewing your insurance needs to ensure you have the appropriate insurance and the right coverage is critical to your financial well-being.
This review should include life, property, and disability insurance. Read this article for a deep dive into reviewing these insurance types.
3. Create An Estate Plan
What is estate planning? Estate planning is the process of arranging how your assets will grow, be protected, and be transferred efficiently and effectively. And this planning involves not only post-death events but also planning for how your wishes will be carried out if you become incapacitated.
The following are the most common estate planning documents that federal employees should have:
- Will
- Financial Power of Attorney (POA)
- Medical Power of Attorney
- Healthcare Directive (or Living Will)
- Trusts
- Beneficiary Designations (on all financial accounts, i.e., your TSP, savings, and checking accounts). Too many Feds forget to add a beneficiary to their accounts!
For tips on creating your estate plan, read here.
4. TSP For New Federal Employees
When considering the Thrift Savings Plan’s low fees, diversified funds, and generous government match, contributing is a no-brainer for most federal employees. However, the question of “how much” to contribute is far more complicated. This question is difficult to answer because it depends on many variables, such as what age you begin to save for retirement, when you plan on retiring, your retirement goals, and existing and future resources, to name a few.
Save At Least Enough For The Match
Assuming you have already established your emergency fund, you should contribute at least enough to get the full match, which is 5%.
How Much Is The TSP Mach?
Here is the breakdown: Your agency will automatically contribute 1% to your TSP and a 100% match of the first 3% you contribute, followed by a 50% match of the next 2% you contribute. For a total maximum match of 5% of your salary!
How Much Should New Federal Employees Save In the TSP?
If you can save more than 5%, a good rule of thumb is to contribute 10-15% of your gross income to your TSP (including your agency match). This savings rate assumes that you start to save for retirement before age 32 and save until age 67. You can be on the lower end of the range if you begin in your early 20s, or you should aim to save more if you’re starting in your late 30s or 40s. When including your agency match, if you begin contributing to your TSP before age 32, you will only have to contribute between 5-10% to fall within the recommended savings rate.
Final Thoughts
Joining the ranks of federal employees brings a host of remarkable benefits, from the FERS pension and TSP to group insurances like FEHB and FEGLI. Yet, it is up to each new federal employee to ensure that they align their finances to support the career and life they desire.
While everyone’s financial situation is different, as a new federal employee, you’ll benefit immensely by following the 4 tips laid out above. By taking a proactive approach to your financial planning, you will be more likely to reap the rewards of a thriving financial position later in your federal career.
Lastly, it’s always a good idea to consult with a fee-only Certified Financial Planner™ to help you make the best decision for your individual needs.
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