Retirement planning can prove a complicated journey for anyone. However, for federal employees, the road to retirement requires navigating unique systems and regulations, which can add further considerations and complexities to the process.
According to recent reports, the federal government employs more than 2 million civilians who live and work in every state and U.S. territory — with more than 140,000 in the state of Virginia. As these federal workers get closer to leaving the workforce, understanding the intricacies of their benefits and making informed decisions becomes paramount for ensuring financial security in their golden years.
The Importance of Federal Retirement Planning
If you’re a federal employee, staying on top of the latest retirement planning information explicitly designed for government employees is critical. Whether you’re just beginning the planning process or are rapidly approaching this important life milestone, information truly is power. Implementing a strategic approach can help you avoid costly mistakes and maximize the benefits available to you through the Federal Employees Retirement System (FERS) or Civil Service Retirement System (CSRS). Read on for actionable insights for federal employees to optimize retirement strategies for federal workers, with a focus on Northern Virginia retirement planning.
Federal Employees Require Strategic Financial Planning
Retirement planning for federal employees often looks significantly different from strategies used by workers in the private sector. Government workers can access benefits like pensions and the Thrift Savings Plan (TSP). However, federal retirement planning is about far more than simply setting aside money.
Maximizing your assets beyond your government career demands understanding the federal employee retirement systems’ rules, timelines, and nuances. Successfully moving toward your financial objectives also means making smart investment choices and having a plan that considers health and life insurance. If you’re in the Northern Virginia area, it’s also crucial to understand how state tax laws will affect your retirement income. Creating a thorough plan as early as possible in your career can help protect your investments and better equip yourself to avoid costly missteps.
Understanding Federal Retirement Systems (FERS & CSRS)
Federal employees have two major retirement systems: The Federal Employees Retirement System (FERS) and the Civil Service Retirement System (CSRS). Knowing which system applies to you is the first step in developing a savings strategy that aligns with your goals. Here’s what you need to know about each system:
Federal Employees Retirement System (FERS)
First launched in 1987, FERS (commonly called the “new system” is a three-part plan that includes the Basic Benefit Plan, Social Security, and the Thrift Savings Plan (TSP) with matching agency contributions. The Basic Benefit Plan is a pension system, and Social Security contributions are made as part of your regular payroll deductions. The TSP, similar to a 401(k), allows employees to invest for retirement through government-provided savings accounts.
Civil Service Retirement System
The Civil Service Retirement System (commonly called the “old system” was established for government employees hired before 1984. Unlike FERS, CSRS does not include Social Security but does provide a substantial pension based on years of service and salary history. Employees under CSRS are often eligible for higher pension payouts than those under FERS but may need to compensate for the lack of Social Security benefits with additional personal savings. Today, most retirees are under the FERS system, so this is where we’ll spend the bulk of our time in this article.
The best time to plan for retirement is now. Schedule a free consultation with Good Life Financial Advisors of NOVA and ensure you have a strategic retirement plan in place.
Key Steps in Federal Retirement Planning
No matter what program you’re in, there are a number of important steps government workers can take when planning for life after the workplace.
Determine Eligibility
It’s important to know when you’re eligible for retirement. Generally speaking, for most FERS employees, the minimum retirement age is 57, with 30 years of service for full benefits. The rules are different for law enforcement, firefighters, and air traffic controllers.
Estimate Your Pension Benefits
Understanding what your pension will look like is one of the most important steps as you plan for your retirement.. You can use tools like the FERS Retirement Calculator to estimate your pension benefits based on your years of service, salary, and other factors. Consider revisiting these estimates regularly, especially as you approach the end of your career. Additionally, you may want to consider whether a survivor benefit is right for your situation.
Maximize Your Thrift Savings Plan (TSP)
For employees under FERS, your Thrift Savings Plan (TSP) will likely be a significant source of retirement income. LIke a 401k, the TSP allows you to contribute pre-tax dollars and offers several investment options. In 2022, the program expanded and began allowing investment into mutual funds with various providers as part of the mutual fund window. You can read my previous article on the topic here: https://www.forbes.com/councils/forbesfinancecouncil/2022/06/30/why-more-investment-choices-arent-always-a-great-thing/.
If you’re close to leaving the workforce, it’s also important to regularly review your TSP investment allocations. Federal workers sometimes leave their investments in the default funds, which may not be the best fit for their long-term goals. Consider reallocating your investments based on your risk tolerance and the time you have left before retirement.
Review Health and Life Insurance Options
As a government worker, you should ensure that your healthcare and life insurance needs are covered. Many employees can continue their Federal Employees Health Benefits (FEHB) into retirement, but you’ll need to evaluate whether it makes sense based on costs and coverage. The FEHB program is one of the most comprehensive options available, but premiums can increase in retirement. One of the key components of the FEHB is that you usually don’t have to sign up for Medicare Part B. This can be a big savings, especially if you fall into an income level subject to IRMAA. Before you decide to forego Medicare Part B, you absolutely need to verify with your FEHB plan whether or not Part B is required.
Additionally, you should consider your Federal Employees’ Group Life Insurance (FEGLI). This group term life insurance can be retained after retirement, but the premiums will rise as you age and benefit levels often decline. It may be worth exploring other life insurance options or reducing coverage to save on costs if you still have an insurable need after retirement.
Consider Your Social Security Strategy
If you are a FERS employee, you are eligible for Social Security benefits in addition to your pension and TSP. Deciding when to begin receiving Social Security is critical to your federal retirement planning. The longer you wait (up to age 70), the higher your monthly benefit will be. Delaying until age 70 can increase your benefit by up to 32%. However, some employees opt to begin taking Social Security payments earlier depending on their financial situation and other retirement income sources.
For more information on Social Security, check out our blog series Understanding Social Security here:
Understand Your Social Security & How it Works: Part 1 of 3
Understand Your Social Security & How it Works: Part 2 of 3
Understand Your Social Security & How it Works: Part 3 of 3
Common Mistakes and Strategies to Help Avoid Them
All industries have common mistakes and miscalculations regarding financial planning — and the government sector is no exception. Some common mistakes to have on your radar include:
Not Planning Early Enough
One of the most common mistakes federal employees make is waiting too long to start planning. Federal retirement planning should not be left until the final years of service. Starting early helps provide the time needed to make more informed decisions about your TSP investments, pension benefits, and insurance options.
Neglecting TSP Investment Allocations
Many federal employees default into safer but lower-return investment options within the TSP, which may not provide enough growth for long-term retirement needs. Regularly reviewing and adjusting your investment portfolio can help align it with your overall financial goals. If you’re unsure how to adjust your TSP, consulting a financial advisor who specializes in federal employee retirement can be beneficial.
Neglecting Tax Planning
The importance of understanding how your retirement income will be taxed can not be overstated. FERS pensions are fully taxable at the federal level, while Social Security may be partially taxable. Additionally, once you hit age 73, you will usually have to start taking required minimum distributions (RMDs) from your TSP or traditional IRAs. This can really add up and cost A LOT in taxes. Knowing how taxes will impact your budget after you retire can help you make the best choices for you.
Ignoring Long-Term Care
Many retirees find themselves in need of extensive medical attention. In fact, the average 65-year-old has a 70% chance of needing long-term care services. Consider whether long-term care insurance is appropriate for your situation to ensure you have the coverage you’ll need.
Failing to Account for Spousal Benefits
If you’re married, it’s important to consider how your retirement choices will affect your spouse. FERS and CSRS offer survivor benefits, which provide a continued income for your spouse if you pass away. However, opting for a reduced pension now to provide this future benefit requires careful consideration. Failing to plan for these benefits could leave your spouse with limited financial resources.
Not Seeking Professional Advice
One of the most significant mistakes government employees make is not consulting with a financial advisor experienced in federal benefits. A knowledgeable advisor can help you understand your options, create a customized plan, and avoid costly errors. Professional guidance is especially important when managing TSP investments, understanding spousal benefits, and preparing for tax implications in Northern Virginia retirement planning. Trying to handle everything alone may lead to missed opportunities and oversights that could affect your financial future.
Tailoring Your Retirement Plan to Northern Virginia’s Tax Laws
Local tax laws can significantly impact retirement income for those living in Northern Virginia. Virginia does not tax Social Security benefits, which can be a significant advantage for FERS retirees. However, pensions and TSP withdrawals are subject to state taxes.
One important tax strategy to consider is Virginia’s Age Deduction, which provides additional tax relief for residents aged 65 and older, depending on income levels. Working with a financial advisor who understands the tax implications specific to Northern Virginia retirement planning can help you minimize your tax burden and optimize your income.
Another consideration is the cost of living in Northern Virginia, which can be higher than in other regions. Incorporating this factor into your planning can help create a cohesive strategy aligned with your desired lifestyle.
Contact Good Life Financial Advisors of NOVA Today
Federal retirement planning is a multi-step process that demands a thorough understanding of the FERS and CSRS systems and smart management of TSP investments, health insurance, and tax strategies. By taking the right steps now—planning early, maximizing your benefits, and steering clear of common pitfalls—you can keep moving forward toward your financial goals.
To make sure you’re on the right track, it helps to have professional guidance. Good Life Financial Advisors of NOVA specializes in federal retirement planning and can help you tailor a strategy that meets your unique needs. Schedule a free consultation today to gain personalized advice and ensure you’re strategically aligning retirement benefits with your desired lifestyle.
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The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.
