What feds in the middle of their career, having between 5 and 15 years of service, should be thinking about regarding retirement planning.
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Oftentimes when I meet with Federal employees, I am asked, “What can I be doing to make sure I am getting the most out of my benefits?”
Well, the answer is, “There are MANY things you can and SHOULD be doing at every stage of your federal career!”
I recently wrote about what is important for Feds in the early stages of their careers. This article will focus on what employees should be doing in their mid-career years to ensure the best retirement outcomes.
Let’s start with a definition of vested mid-career. For purposes of this article, mid-career is defined as being between 5-15 years of service. I am choosing 5 years not by accident, but with purpose. Once you reach 5 years of service, you are vested in the pension system. This means that even if you leave government service, (as long as you leave your retirement contributions made in the retirement system!) you would be eligible to receive a pension at some point in the future, usually at either age 60 or 62.
Important: If you are thinking of leaving government service in these mid-career years, you need to understand the rules around how to maintain eligibility and file for a future pension - It is not automatic!
Once that 5-year mark is achieved, following these action items should give you the best opportunity for a terrific retirement when the time comes:
1. Deposits Made?
Ensure you have made any deposits that you are eligible to make. Generally, former active-duty military members should plan to “buy back” the time they served in the military. Doing so will add to your service time in the calculation of your future retirement annuity. There are exceptions to this rule. For example, if someone retired from the military, and is receiving a military pension, it often does not make sense to buy back that time. However, sometimes it does! Do not wait to research this! As a mid-career employee, there is interest that accrues on the amount of what is owed each year that you wait. Obviously, the longer you wait, the more interest you will owe. I have seen employees owe thousands of dollars in interest on a deposit they did not make early in their government careers - Do not wait on this!
2. Understand the retirement eligibility criteria.
Generally, to maximize your federal retirement benefits, it is to an employee’s advantage to work until at least their Minimum Retirement Age (MRA). This age will be based on your year of birth and is somewhere between the ages of 55-57. Once you have reached your MRA with at least 10 years of service, you are eligible to retire from the government on what is called an “immediate annuity.” There are different types of retirement from government service, including deferred, postponed, and immediate are the three most common. During these mid-career years, take the time to learn what each means and make sure you do not miss out on valuable benefits because you did not understand the options. It is important to know and understand your Retirement Service Computation Date.
3. Pay attention to the rising costs of your FEGLI life insurance.
During these mid-career years, the cost of your FEGLI government life insurance is slowly rising. Slow enough that many employees don’t even notice it. However, this is the time to be pro-active with your life insurance planning! I have seen employees literally save thousands of dollars by completing a thorough life insurance review during these years.
4. Contribute to a Health Savings Account (HSA)
Effective use of a Health Savings Account in these years can be a tax-saving machine both now and in retirement. Consider this, your traditional TSP is a tax-saving vehicle while working, but can be a tax generating machine in retirement. In contrast, the Health Savings Account is a way to save taxes both now and in retirement (withdrawals that are used for qualified medical expenses in retirement will never be taxed!) - Do not overlook the potential this account can offer you!
5. MSYM - Make sure you MAX.
Increase your TSP contributions annually. There is no dispute that federal employees who focus on their TSP, increasing contributions, and executing a good investment strategy during these years increase their ability to retire and thrive exponentially compared to those who simply hope for the best. As the annual limits rise, make sure you increase your biweekly contributions increase, too. And, if you have not already, you should explore the benefits of using Roth TSP during these years. Remember, there are no income limits on Roth TSP as there are with Roth IRAs. This is an opportunity you cannot afford to miss!
But Jen, I don’t know if I’m going to stay a Fed for my entire career!
Relax, that’s perfectly fine. I refer to vested mid-career employees as “invested” in their government service. 5 to 15 years of your life is indeed an investment. As a Fed in this group, you may not be certain you will stay all the way through to retirement, but you now recognize there are potential trade-offs in future benefits if you choose to leave. Our mission is to provide the information and content to help you make the best decisions for YOU!
All of that being said, committing to government service is the next step in the life cycle of a Fed. This usually happens when an employee decides; “this is where I belong,” I am going to “go the distance” and retire from government service. This Committed Mid-Career Fed (CMC) will be the focus of my next article.
On a daily basis, I am fortunate to have the opportunity to meet many federal employees and retirees. By sharing the common themes for success that I see, my hope is that every single federal employee is empowered and able to make the most of their federal benefits. Feel free to contact me with additional questions or input.
**Written by Jennifer Meyer, Financial Planner. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jennifer Meyer and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **
