Seven tips (plus one bonus suggestion) for Feds in their early career. It’s never too early to start planning for retirement.
Federal employees often come to the government with little understanding of the complete benefits package they are entitled to. If I had a nickel for every time I heard “I wish I knew that before”, I may not be writing this article today!
Since I am writing this article- my goal is for you, as a federal employee, to not ever say, “I wish I knew that before!” I have compiled a list of the top things new employees should be aware of and act on in the early days of their federal careers.
1. Have a Smart TSP Strategy!
Maximize your contributions to your TSP. “Time in” is an important concept. The earlier an employee begins to contribute the longer the funds will have to take advantage of the amazing impact of investment compounding. The more time your money has to compound the better for you. Put in as much as you possibly can. This is the single most important thing a new employee can do to ensure their financial future.
For 2022, the maximum an employee can contribute is $20,500. If over the age of 50, an additional $6500 can be contributed, bringing the total to $27,000.
“But Jen, I’m just getting started, I have expenses. I can’t put that much in”.
No problem, put in as much as you can, at the very least, but be sure to contribute 5% of each paycheck to the TSP. By contributing 5%, an employee will be entitled to the full government match- which is 5%. This means that you are essentially saving 10% of your income- but you are only having to put in 5% of your money to get that 10%. Do not make the mistake of thinking that putting 5% into TSP annually will lead to a comfortable retirement one day. Putting 5% in is not wise, it is just that putting less than that amount in is foolish by comparison.
Once you begin, set a goal to increase your contribution as often as possible until you are getting the maximum amount in. I have known many TSP millionaires. This does not happen by luck, almost all of them were disciplined about increasing their contributions at least annually to reach the maximum amount allowed.
Make smart decisions regarding your TSP investments. While getting the match is generally the most important action to take with TSP, following extremely close behind that is understanding how to invest the funds you are saving. Decisions like whether to use Roth versus Traditional TSP (remember there are no income limits in Roth TSP like there are in Roth IRAs!) and how to allocate the funds among the different investment options can be the difference between a retirement of subsistence versus a retirement of abundance.
2. Buy in with military time.
If you have previous military or other creditable service, that could count towards your federal service – explore the costs of “buying that time back”. I meet with employees who do not do this right away and find out later that it will increase their retirement pension, and in some cases even allow them to retire earlier. When you do this “buy-back” within a few years of starting your government service, you will pay no interest on the buy-back. However, if you wait until you are thinking about retiring, you could owe thousands of dollars in interest charges! Do not wait on this if you are potentially eligible!How? Because I have seen feds at all income levels successfully build a retirement where they can thrive and prosper. I hear all the time, “I wish I knew this earlier; I would have done things differently.”
3. Take advantage of FEGLI life insurance.
New employees can enroll in the government’s life insurance programs without having to answer any health questions. This window is short, you must sign up within 60 days of hire. For example, a young employee could secure up to 6 or 7 times their salary in life insurance with no underwriting requirements by signing up when originally hired. Of course, there are costs for the life insurance that will be paid via the employee’s salary. Even if there is not a current need for life insurance, this could be a good idea if the employee plans to have a family in the future, and is especially a good idea if there are any health issues that could preclude an employee from getting coverage in the private sector.
4. Understand when you become vested in your federal benefits.
Many employees, especially if they have worked in the private sector are familiar with the word “vesting” as it pertains to their employer-sponsored retirement plans. As a government employee, there are several vesting schedules to be aware of. For example, once an employee has 5 full years of service, they are eligible for a deferred retirement annuity. This means that if an employee leaves government service after completing 5 years of service, they are eligible to receive a pension at either age 60 or 62! They must request that pension and the amount will depend on how many years of service they completed and their high three average salary. There is one very important stipulation to this benefit though. The employee must leave their retirement contributions in the system when they leave. To be fully vested in the federal employee’s health insurance (FEHB) and life insurance (FEGLI) programs for retirement, an employee must be enrolled for the immediate 5-year period prior to retirement. Lastly, the vesting schedule for the 1% automatic TSP agency contributions is 3 years. Too often employees miss out on valuable benefits because they are not familiar with these rules. Don’t be one of those employees!
5. Review and understand your Leave and Earnings Statement (LES)
There is so much important information on this statement! You will see your biweekly income and the deductions for taxes and the cost of your health insurance, life insurance, and other benefits, if applicable. You also will see the contributions you are making to the government’s retirement and TSP plans. Keeping track of your sick and annual leave is another important task that can be done through the LES. Did you know that if you ultimately retire from the government under an immediate annuity, your accumulated sick leave will be added to the pension calculation? It is a great planning strategy to save as much sick leave as you can. You can be paid for that leave for the rest of your life via your pension.
6. Participate in FSAFeds healthcare and dependent care savings accounts-
These accounts allow you to set aside pre-tax funds for healthcare and childcare costs. Funds that are contributed are not taxed and when the funds are used for healthcare and/or childcare- they will not be taxed. In some accounts, the funds can also be invested, so that any investment growth will also not be taxed. More on this in a future article. This is a best kept secret!!!
7. Complete and submit beneficiary forms for your federal benefits.
These are the key beneficiary forms to complete-
- Form TSP-3 (TSP Beneficiary)
- Form SF 1152 (Unpaid Compensation and Unused Annual Leave)
- Form SF 2823 (FEGLI Life Insurance)
Consider enrolling in the Federal Long Term Care plan with simplified underwriting. This is another opportunity to get coverage without having to prove insurability. During the first 60 days of employment, an employee and spouse (if applicable) can enroll in the plan after answering a few health questions. This is a great opportunity, especially if there are any reasons to think you may not qualify if you went through the regular underwriting process.
I hope this list will help you get started on a GREAT career. The federal government is a terrific place to build a solid financial future, but it generally does not happen by accident. Be proactive and educated about your benefits from day 1 to make the most of your career!
**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. **