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Retirement Planning for Federal Employees

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With just over 2 million federal employees, the U.S. Government is one of the largest employers in the world. As a federal employee, you’ve likely worked in different capacities. As you’re nearing retirement, you might find yourself leading America’s workforce as a member of the Senior Executive Service (SES), or serving in other leadership roles in the scientific and professional (ST) or senior level (SL) realms. Alternatively, you might now be working in the private sector as a consultant or contractor.

Retirement planning advice usually focuses on 401(k) plans and Social Security benefits. However, since you’re a Fed, the general advice about company-sponsored plans doesn’t apply to you. 

As a federal employee, you have access to a powerful compensation package offered exclusively by the U.S. government. When you retire, you’ll collect benefits from:

  • CSRS or FERS pension
  • Social Security
  • Thrift Savings Plan (TSP)
  • Federal Employees’ Group Life Insurance (FEGLI)
  • Federal Employees Health Benefits (FEHB)

With all these options, all federal employees need an individually tailored approach to retirement planning. 

While the Office of Personnel Management (OPM) offers a robust and comprehensive informational resource base, sometimes it can feel like you’re trying to make sense of the IRS tax code. The OPM puts all of the responsibility on you to understand how to make all the big decisions about your pension and survivor benefits, insurance, and TSP investments. And if you make the wrong choices with your benefits, you could potentially be costing yourself thousands of dollars in missed opportunities, every year for the rest of your life. Oftentimes, these mistakes are irreversible.

That’s why it’s crucial to understand not only how your benefits work, but also how they fit into the rest of your retirement plan.

Let’s dive into all the different retirement benefits that you enjoy as a federal government employee.

Table of Contents

Federal Government Employee Retirement Benefits

Depending on when you began your service, you’re either covered by the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS). The retirement benefits you’ll receive from these plans are structured as annuities based on your age, years of service, and plan contributions.

Civil Service Retirement System (CSRS)

If your federal employment began before January 1, 1984, you’re grandfathered into the Civil Service Retirement System (CSRS), a classic pension plan. CSRS employees have the superior pension benefit: upon retirement, you’ll receive an annuity that provides enough income to maintain your standard of living. You’ll also receive cost-of-living adjustments regardless of the age at which you retire.

However, because Social Security taxes aren’t deducted from your paycheck, you won’t be eligible to receive Social Security benefits unless you’ve earned them through another job or qualify through your spouse. If you do qualify for Social Security, your CSRS pension may reduce your benefits.

Federal Employees Retirement System (FERS)

If your federal employment began after January 1, 1984, you were automatically enrolled in the Federal Employees Retirement System (FERS). FERS covers all employees in the executive, judicial, and legislative branches of the federal government. However, FERS doesn’t cover military personnel, nor employees or state or local governments.

FERS is a three-part retirement system which provides Social Security benefits, a comparatively pared-down pension, and a Thrift Savings Plan (TSP). Despite the smaller pension, FERS is still a strong retirement package—and what you lose in pension benefits can be supplemented through your TSP investments. You’ll receive cost-of-living adjustments starting at age 62 unless you’re a special category employee (such as a law enforcement officer, air traffic controller, or disability retiree).

Social Security Benefits

Social Security is designed to supplement your other sources of income, like your savings, investments, pensions, and insurance plans. 

All FERS employees are eligible for Social Security benefits at retirement. Throughout your service, you pay Social Security taxes at the current tax rate. Your employer, the U.S. Federal Government, pays an equal amount. 

How your Social Security benefits are calculated

First, Social Security will take your 35 best-paid years to produce your average indexed monthly earnings (AIME)

Then, Social Security will apply a formula to your AIME to determine your primary insurance amount (PIA). That’s the amount you’ll get each month from Social Security if you wait until full retirement age (currently 66 and gradually rising to 67 for people born in 1960 or after) to claim benefits. 

Finally, your benefit changes depending on the age at which you claim Social Security. They’ll take a sizable portion of the full benefit if you’re younger than full retirement age—if you start Social Security at 62, the earliest possible age, you can lose more than a quarter of your benefits. Conversely, if you delay your benefits, they add to your benefit for each month between full retirement age and age 70. You can gain up to 32 percent extra in benefits this way!

When you can collect your Social Security benefits

The earliest you can start collecting retirement benefits is age 62. You can apply once you reach 61 years and 9 months of age. You’ll become eligible for 100 percent of your monthly benefit at full retirement age, which is determined by the year you were born. 

If you’ve met the full age and service requirements for an annuity under FERS, but aren’t at full retirement age, you may receive a Special Retirement Supplement until age 62. This benefit is roughly the amount of your Social Security benefit, and ends when you begin receiving Social Security.

What is the Thrift Savings Plan (TSP)?

The Thrift Savings Plan was introduced in 1986 as part of the Federal Employees’ Retirement System Act. TSP is the government’s version of a defined contribution plan, similar to a corporate 401(k). As far as defined contribution plans go, the TSP is the largest in the world, with over $5 billion in assets. What’s even better is that 89 percent of participants are “satisfied” or “extremely satisfied” with the TSP!

TSP is made up of automatic government contributions, elective employee contributions, and matching government contributions. As such, your TSP grants you more flexibility and retirement income growth potential when compared to the CSRS pension.

As a TSP participant, you’ll have the opportunity to build your retirement savings in a tax-advantaged account. The keys to building a comfortable nest egg are investing consistently and choosing the right funds to help you build wealth for the long term. These are critical decisions; the amount you decide to put in and your investment strategy will define how much you end up with in retirement.

TSP Contributions

When the Thrift Savings Plan was created, all contributions were treated with a traditional tax treatment. As of 2012, TSP began accepting Roth contributions. Now, when you contribute to your TSP, you can choose between either a traditional tax treatment or a Roth option. 

What’s the difference between the two?

With a traditional tax treatment, you’ll make pre-tax contributions. All withdrawals are taxed in retirement, based on your tax bracket at that time. 

With the Roth option, you’ll pay taxes on the money as it goes into your TSP, but you won’t owe any more taxes on your withdrawals in retirement. Keep in mind that if you have decades until retirement, tax rates are guaranteed to go up. If you’ve already paid taxes on your contributions, you won’t have to worry about taxes on your retirement distributions! The nest egg you’ve worked so hard to build is all yours to enjoy.

Each pay period, the agency you work for deposits 1 percent of your compensation into your TSP account, whether you decide to contribute or not. Your agency will match your contributions—up to 5 percent of your compensation. We recommend contributing enough to maximize your employer match, and double-check to make sure you accrue the minimum years of service for the automatic 1 percent match to vest.

You can contribute up to $19,500 per annum in 2020. If you’re over age 50, you can contribute an additional $6,500.

Just like a 401(k), you can choose how to invest your funds from a selection of fund choices. Because your agency only matches up to 5 percent, consider speaking to a trusted Fiduciary Financial Advisor about investing non-matched funds in an IRA, where you’ll have significantly more investment options.

TSP Funds

The TSP offers five different individual fund options, each one catering to different risk appetites. Low-risk funds invest in U.S. Treasuries, and higher-risk funds invest in international stocks.

  • The Government Securities Investment (G) Fund. The G Fund is the closest you can get to a free lunch. It’s composed of specially-issued US treasury securities designed to guarantee against the loss of principal.
  • The Fixed Income Index Investment (F) Fund. The F Fund is invested in a bond index fund that tracks the Barclays Capital U.S. Aggregate Index, a broad index representing the U.S. Government, mortgage-backed, corporate, and foreign government sectors of the U.S. bond market.
  • The Common Stock Index Investment (C) Fund. The C Fund is invested in a stock index fund that tracks the S&P 500, a broad market index made up of the stocks of 500 large to medium-sized U.S. companies.
  • The Small Capitalization Stock Index (S) Fund. The S Fund is invested in a stock index fund that tracks the Dow Jones U.S. Completion Total Stock Market (TSM) Index, a broad market index of small and medium-sized U.S. companies that aren’t included in the S&P 500 index.
  • International Stock Index Investment (I) Fund. The I Fund is invested in a stock index fund that tracks the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index, a broad international market index made up of primarily large companies in 21 developed countries. It omits Canada, international small cap stocks, and international emerging market stocks.

You have two options when it comes to the different ways you can manage these funds. You can either choose to invest in any of the five funds—G, F, C, S, or I—or you can invest in the Lifecycle fund

The Lifecycle (L) fund is TSP’s version of “Target Date” funds. It’s preferred among federal employees who lean toward a “set it and forget it” investment style. The Lifecycle fund regularly rebalances for you, so your asset allocation shifts as you get closer to retirement. 

While the L fund caters to hands-off investors, it also means you forgo control over your investments. When it comes to your retirement, that’s not always the best choice! For instance, some investments are more tax-efficient than others; these investments should be placed in standard brokerage accounts. Your less tax-efficient investments should be placed in retirement accounts like TSP, 401(k)s, 403(b)s, and IRAs. 

When planning your TSP investments, speak with a Fiduciary Financial Advisor. As with a mainstream retirement policy, it’s essential to consider the rest of your financial picture. Your Advisor can take your other assets—your spouse’s 401(k), your other IRAs, your house, and the rest of your total wealth portfolio—into consideration. 

Federal Employees’ Government Life Insurance (FEGLI)

As a federal government employee, you have access to the world’s largest group term life insurance program, also known as the Federal Employees’ Government Life Insurance (FEGLI). All employees are covered by basic life insurance coverage, which equals your base pay (rounded up) plus $2,000. Your payroll office deducts premiums from your paycheck unless you waive the coverage.

You can also elect to add Optional insurance: 

  • Option A gives your beneficiaries a $10,000 death benefit.
  • Option B allows you to choose 1, 2, 3, 4, or 5 multiples of your base pay. 
  • Option C is for families, providing coverage for your spouse and eligible dependent children. Under Option C, all of your eligible family members are automatically covered. The coverage amount is determined in units – each unit represents $5,000 for your spouse and $2,500 for each dependent child.

We can help you determine whether you need coverage in retirement, as well as the optimal combination of coverage for your unique situation.

Federal Employees Health Benefits (FEHB)

The Federal Employees Health Benefits (FEHB) program provides employee health benefits to civilian government employees and annuitants. You’ll be eligible to continue FEHB coverage if you meet the following requirements:

  • You’re entitled to retire on an immediate annuity.
  • You’ve been continuously enrolled (or covered as a family member) in any FEHB plan for five years immediately before retirement. 
  • If you’ve served for fewer than five years, you must have been continuously enrolled in any FEHB plan for the full period of your service.

Types of Retirement

Your retirement eligibility is determined by your age and number of years of creditable service worked. In most cases, you must reach the Minimum Retirement Age (MRA) to be eligible for retirement. There are four types of retirement:

  • Disability retirement
  • Early retirement
  • Voluntary requirement
  • Deferred retirement

Disability Retirement

To be eligible for disability retirement, you must meet all of the following conditions:

  • You must have completed at least 18 months of federal civilian service.
  • You must have become disabled due to disease or injury, while in a position covered by FERS.
  • The disability must be expected to last at least one year.
  • Your agency must certify that it is unable to accommodate your disabling medical condition in your present position, and that it has considered you for any vacant position in the same agency at the same grade or pay level, within the same commuting area, for which you are qualified for reassignment.
  • You must apply before your separation from service or within one year thereafter. The application must be received by either OPM or your former employing agency within one year of the date of your separation. This time limit can be waived only if you were mentally incompetent on the date of separation or within one year of this date.
  • You must apply for Social Security disability benefits. 

If you meet these requirements, you may receive benefits from all three parts of FERS.

Early Retirement

MRA+10 Retirement

For federal employees who have clocked 10 or more years of service, you can retire at the federal Minimum Retirement Age (MRA). Eligibility for receiving retirement benefits is determined by your age and years of creditable service.

Early Optional Retirement

If your agency undergoes a major change—a reorganization, reduction in force, or transfer of function—the head of your agency can ask the OPM to permit early optional retirement for eligible employees. If your agency is approved, you’ll be notified of the opportunity to retire voluntarily.

Discontinued Service Retirement Because of an Involuntary Separation

Involuntary separation is defined as a separation against your will and without your consent, other than “for cause” for misconduct or delinquency. The most common causes of an involuntary separation are a reduction in force, and when the location of an office is moved to a different region.

If your agency makes you a reasonable offer and you choose to decline the offer and resign, you won’t qualify for discontinued service retirement. And if your agency separates you by adverse action procedures for not complying with a directed reassignment to a position that is a “reasonable offer,” your separation also won’t qualify for discontinued service.

If you’re considering early retirement, we can work with you to determine whether early retirement is feasible. If so, we’ll create a comprehensive retirement strategy to get you there.

Voluntary Retirement

Your eligibility for voluntary retirement is based on your age and the number of years you’ve been in service. Additionally, you must have served in a CSRS-covered position for one of the last two years before your retirement.

If you meet these requirements, you’ll be eligible for full benefits within your first month of retirement.

Deferred Retirement

You are eligible for a deferred annuity if you meet the following criteria:

  • You are at least 62 years old.
  • You have completed at least five years of service.
  • You served in a CSRS-covered position for one of the last two years before your retirement.
  • You didn’t receive a refund of retirement deductions covering your final period of service.

If you receive a deferred annuity, you won’t be eligible to continue any health benefits and life insurance coverage that you had while you were still working. The deferred annuity starts on your 62nd birthday, no matter when you apply for it.

We Can Help

Federal government employees benefit from an exceptional retirement system, but like most retirement plans, you may find it difficult to navigate your options. It can be confusing to decipher the alphabet soup of benefits, including CSRS and FERS, Social Security, TSP, FEGLI, and FEHB.

Some common questions that we hear from Feds include:

  • How much should I contribute to my TSP?
  • How should I invest the funds in my TSP? How should I change my portfolio as retirement becomes closer?
  • When will I be ready for retirement? How will I know whether I have enough for retirement?
  • Is my Federal Employee Group Life Insurance (FEGLI) enough to keep my family safe?
  • What TSP distribution strategy should I use?
  • How do I decide on my pension benefits?
  • How will my benefits affect my taxes and Social Security?
  • How should I invest money outside of my TSP? 
  • How do my spouse’s retirement benefits interact with my federal benefits?

So, what can you do to ensure your retirement plan is on track for success?

Partner with a Fiduciary Financial Advisor who understands your federal employee benefits and financial picture inside and out.

One important distinction between a Fiduciary and non-Fiduciary: A lot of federal retirement specialists aren’t Fiduciaries, which means they aren’t required to put your needs before their own. As your Fiduciary Financial Advisor, we’re well-versed in the federal compensation structure and benefits, and we have the Fiduciary duty to give you the best possible advice. 

Most of us look forward to retirement as a meaningful time—but a meaningful retirement doesn’t just happen. It takes careful planning. Understanding your Federal retirement benefits and when you can retire are specific to each client’s planning process. That’s why, before creating your retirement strategy, we assess every client’s full financial picture through our Fingerprint Financial Planning™ process. 

You deserve to have an individually tailored retirement plan. After all, it’s not just your money—it’s your future.

If you’re interested in learning more about how a Fiduciary Federal Financial Advisor can help you make a smooth transition into retirement, please fill out the form below. We offer a complimentary consultation, and we look forward to speaking with you.

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DISCLAIMER: Advisory Services offered through Prosperity Financial Group, Inc., an Independent Registered Investment Advisor. Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Prosperity Financial Group, Inc. and Fortune Financial Services, Inc. are separate entities.

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