Retirement Guidelines for Federal Government Employees

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Government piggy bank The federal government is reviewing federal employee benefits for ways to help shrink the $1 trillion budget deficit. Federal employees are already coping with a two-year pay freeze and one proposal extends the pay freeze to five years. Other proposals have included ending the Federal Employees Retirement System (FERS) for employees with less than five years of service and freezing the benefits earned for those with more than five years of service. This would preserve the existing benefit but additional benefits would not accrue. Another proposal requires federal employees to increase their contributions. FERS employees would contribute 7% of pay up from 0.8% and Civil Service Retirement System (CSRS) employees would have to contribute 10% of pay up from 7%.CSRS is a defined benefit pension system that pays federal employees a percentage of their salary when they retire. There are five categories of benefits under CSRS and eligibility is based on the employee’s age and years of service at retirement. The benefit can be up to 70% of earnings but that is being phased out. Employees share in the expense of the pension to which they become entitled. CSRS covered employees contribute 7, 7 1/2 or 8 percent of pay to CSRS in lieu of paying into the Social Security system. CSRS employees must pay the Medicare tax (currently 1.45 percent of pay). The employing agency matches the employee’s CSRS contributions to the pension in the same way that employers match their workers Social Security taxes.FERS was created by Congress in 1986 and provides federal employees with benefits from three sources: a basic benefit plan, Social Security, and the Thrift Savings Plan (TSP). FERS replaces CSRS for federal employees hired after January 1, 1987. The basic benefit plan and Social Security parts of FERS require employee contributions into the programs in exchange for receiving monthly payments after they retire. FERS pays only 30% of earnings through the basic benefit plan. TSP is the government’s version of a 401(k) plan with its 5% matching contribution. In theory, a federal employee can come close to nearly the same monthly benefit in FERS as they could in CSRS when combining the payments from the basic benefit plan, Social Security and turning the TSP into monthly annuity payments.

TSP investment options are limited as compared to the typical private company 401(k) plan. There are only three stock fund options – Common Stock Index, Small Cap Index, and International Stock Index. The menu is completed with two fixed income funds and several lifecycle funds that allocate funds over the five investment choices based on the time you have left until retirement. Federal employees can elect to defer up to $17,000 of pay in 2012 on a pre-tax basis. Those employees that are age 50 or older can also make a catch-up contribution of $5,500 this year.

Federal employees within five years of retirement should download an updated Statement of Earnings and Leave, which discloses the employee’s service computation date, TSP earnings and contributions as well as health and life insurance policies. This statement is available electronically on the employee’s personal page at the National Finance Center’s website. A financial adviser can calculate retirement benefits and provide a projection of what retirement income would look like at a target retirement age.

This is a terrific time for federal employees that are close to retirement age to consider retiring before benefits are changed. Even early retirement is a possibility because the health-care plan for federal employees provides benefits that are usually not available to early retirees in the private sector. Private companies usually only provide coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA). COBRA coverage is only available for 18 months. Workers in the private sector typically don’t retire before age 63 ½ so they will be eligible for Medicare when COBRA expires. Federal employees retiring at age 55 get health-care coverage immediately.

Federal employees considering retirement should begin with an analysis of what service credits may be available to them. The service credit program allows employees to make payments into either CSRS or FERS for periods of service during which they did not contribute to the Civil Service Retirement. These service credit deposits allow the employee to maximize the benefits they will receive upon retirement.

Anyone planning to retire within the next 12 months should confirm they are eligible to receive retirement benefits for the date they would like to retire. Make sure all your records are complete and accurate and all service time is verified. Pension mistakes are difficult to fix after you’ve started retirement. It is vitally important that this information is accurate before benefits begin. Check that the beginning and ending dates for each period of employment is correct. This would be a good time to verify the beneficiary listed on your retirement accounts is still the person you want designated. File a new beneficiary designation if none is listed or if you want to name a different beneficiary.

Your final step should be to meet with a financial adviser that specializes in retirement before retiring. Retirement decisions are complex and may carry heavy financial and tax penalties if you withdraw funds incorrectly. Most pension elections are irrevocable. Getting the opinion of someone who understands the implications of benefit choices is extremely valuable before you sign any of your retirement forms. Finally, you may not have taken into account tax and other issues in your planning. Even if you think you have it all figured out, a financial adviser can provide insight into the transition process – especially the move from accumulating assets to spending them. A competent financial adviser can help give you the peace of mind to confidently step into retirement when you are ready. The College of Financial Planning awards the designation of Certified Retirement Planning Counselor (CRPC®) to advisers that have completed a course of study encompassing pre-and post-retirement needs, asset management, estate planning and the entire retirement planning process using models and techniques from real client situations. You can find one in your area at their website.

Rick’s Insights

  • Federal employees close to retirement age should consider retiring before further changes to their benefits are implemented.
  • Those considering retirement should begin with an analysis of what service credits are available in order to maximize the benefits they will receive upon retirement.
  • Evaluate your Statement of Earnings and Leave to verify your benefits are complete and the information is correct.

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