Start 2022 Off Right- What Feds should do now to set yourself up for financial success in 2022 and Beyond
I am often asked, “what else should I be doing to make sure I am set when the time comes to retire?” There is no one-size-fits-all answer to this question. In this article, I am taking a big picture view to give employees my list of what every federal employee should be doing on an annual basis to put themselves in the best position for an easy transition to a successful retirement. With the new year upon us- there is no time like the present to check these items for 2022!
1. Review and Increase TSP Contributions
Every year the IRS provides guidance for the maximum contribution an employee can make into TSP. The amount differs if you are over or under age 50. Note that if you turn 50 anytime in 2022 you can start contributing the higher amounts now- you do not need to wait until you actually turn 50! For 2022, the amount an employee can contribute if they are under age 50 is $20,500. If you are over age 50, the IRS increased the amount you can contribute to $27,000 annually. Make sure at a minimum that you are getting at least 5% of your pay contributed each pay period to get the full government match! The “each pay period” of the last sentence matters. The government match is made every pay period, so if you stop contributing before year-end, you will miss out on some of the match.
2. Review and Rebalance Asset Allocation
It can be confusing for employees who are often told it is best to leave their TSP alone in order to maximize their long-term return. I interpret this advice to mean, do not try to time the market by moving in and out of funds based on recent performance or worse, fear about future performance. However, it does not mean that an employee should put their head in the sand for years at a time without reviewing their allocations. Modern Portfolio Theory prescribes rebalancing to maintain asset allocation over time. When done correctly, this will minimize risk and maximize return. In addition, keep in mind that this principle is also relevant for any outside investment accounts an employee may have.
3. Life Insurance Review
An employee may save thousands of dollars (literally!) by diligently reviewing their life insurance policies. The government life insurance (FEGLI) will increase in cost every 5 years as employees age. These increases are generally small for employees under age 50- oftentimes they go unnoticed. However, as the employee approaches age 50 and beyond, the increases become greater. Too often, employees are shocked when they realize the projected cost to keep their life insurance far exceeds their expectations. At this point, the options may be limited. However, with proper planning, this can be avoided. An annual life insurance review is a critical component of planning for financial success in retirement. Do not put this off!
4. Tax Planning
Far too often, employees assume that there is not much they can do about their tax situation. This is false. Employees can change their tax withholdings during the year, and the decision of how to use Traditional versus Roth TSP has both short- and long-term tax implications. Employees should work with a tax advisor to determine if they should make changes to their current elections. In addition, making use of the Flex Spending Accounts is another way to save on taxes. Also, consider the use of a Health Savings Account for long-term tax benefits.
5. Pay Down Debt / Build Emergency Reserves
Everyone knows that high-interest credit card debt is bad, but too many people still carry it. In today’s competitive environment, if an employee cannot pay off their debt easily, it is not difficult to find a lower interest rate – or even zero interest for a period of time- option. Taking 30 minutes to search out these options can also save employees hundreds and sometimes thousands of dollars in interest expense annually. If you are carrying significant credit card debt, please do not assume you have no options. Along with this comes building emergency reserves. The best way to avoid credit card debt is by having an emergency reserve account that you can tap into versus taking on debt. The goal is to have 3- 6 months of liquid funds available.
6. Create and/or Update Your Net Worth Statement
Everyone should keep a net worth statement. It captures all of your assets and liabilities on one sheet. The difference between your total assets and total liabilities is your net worth. Your number one goal annually should be to increase your net worth every year. It does not have to be big increases, but moving in a positive direction is the goal.
7. Review Social Security Statement Annually
Every calendar year, your social security statement will update the earnings for the prior year. It is critical that you ensure social security is using the correct earnings figures for you as this will become the basis for your social security retirement benefit. Do not assume that social security does not make mistakes! It takes only a few minutes to confirm this via ssa.gov.
8. Manage Your Annual and Sick Leave
Did you know that when you retire your annual leave is paid out in a lump sum a few weeks after you retire? Your sick leave is converted to years and months of service and used in the computation of your pension. I have seen employees retire with over a full year of additional service time due to the addition of their sick leave. Of course, when one is sick, they should use their leave, but to the extent that an employee can save their sick leave- it is a way to get paid on that time for the rest of your life in the form of a higher pension.
These are just a few of the important steps every federal employee should be taking now to make sure they are prepared for a great financial future- both while working as well as when retired. Serving Those Who Serve sponsors monthly webinars to provide employees with the education and resources they need to make the best decisions for their financial success. The webinars are complimentary and are a great way to get 2022 started on the right foot. Here is a link to the upcoming sessions – feel free to review the menu and register for any and all of the topics. I promise you will not be disappointed!
**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. **
