There are many benefits to working for the federal government, (1) but perhaps the greatest is that it can set you up for much financial success. After all, being able to retire after 30 years of service is something most private-sector employees can only dream of. Although, just because you are allowed to retire after 30 years doesn’t mean you can. Without proper planning and financial management, retirement can be just as elusive for federal employees as it is for everyone else.
I have seen firsthand people who have failed to plan and end up going back to work after attempting retirement. I know how difficult that can be, so I want to do all I can to prevent you from experiencing it. Let’s take a look at what you need to do to be able to retire on time.
Know Your Retirement Age
One of the keys to retiring on time is maximizing your retirement benefits. When you retire and how long you have been in service will greatly affect the benefits you receive. If you retire before you have reached your minimum retirement age (MRA) or before you have completed enough service, you will not be able to maximize your benefits. The following chart shows your minimum retirement age:
(2)
To receive full benefits, you must have 30 years of service and reach your MRA or 20 years of service and be age 60 or older. If you have between 10-30 years of service, you are allowed to retire at your MRA, but your benefits will be reduced by 5% a year for each year you are under age 62. For example, if you retire at age 56 with 19 years of service, your benefit will be reduced by 30% (5% for each of 6 years). However, if you work 4 more years and retire at age 60 with 23 years of service, you will receive the full benefit.
The amount of benefit you receive will affect your ability to retire successfully (i.e., having enough money to live on without going back to work). It is important to strategically balance your years of service and retirement age in order to receive a high enough benefit to support you during retirement. Sometimes simply working one or two more years can make a big difference in the benefits to which you are entitled.
Keep Your High-Paying Job A Little Longer
Another factor in your benefit calculation is your salary. Under FERS, your pension benefit is calculated as:
(average of 3 highest years’ salary) X (years of service) X (pension multiplier)* = (annual pension benefit)
*The pension multiplier depends on your years of service and age at retirement, as discussed above.
If your salary significantly increases shortly before retirement, working a couple more years may be well worth it. Let’s say you plan to retire at age 60 with 30 years of service. One year prior, you go from earning $100,000 as you did for the previous 2 years to $120,000. If you retire as planned, your pension benefit will be:
$106,667 X 30 years X 1.1% = $35,200
If you decide to stay in that higher-paying job for two more years, your pension benefit will be:
$120,000 X 32 years X 1.1% = $42,240
Staying in the higher-paying job for at least three years to increase your benefit calculation can make a big difference in retirement. In our example, it is a $7,040 difference per year. Over a 20-year retirement, that comes out to $140,800.
Take Advantage Of Your TSP Match
In addition to your FERS pension, as a federal employee, you have access to the Thrift Savings Plan (TSP). Instead of getting a promised pension amount, what you get out of it is a combination of what you put in and how you invest it, much like the popular private-sector 401(k) plan. It is your choice whether or not to contribute to the TSP and how much you put in it.
To build up the most funds for retirement, you need to contribute up to your agency’s match. Receiving a matching contribution from the government is essentially an immediate 100% gain on your money. Your agency matches your contributions up to 5% of base pay, so you should contribute at least that much. Contributing any less is leaving free money on the table, money that will fund your retirement.
Invest Your TSP For Growth
On top of getting your agency match, you want to make sure your TSP funds are invested wisely. Where you put your money over a 30-year career can make a huge difference in your account balance when it comes time to retire and, therefore, your ability to do so. It may be tempting to keep your money protected from the volatility of the stock market, but that also robs you of the opportunity for your money to grow along with the stock market. Without that growth, you may not have enough funds to retire on time.
The right investments for your TSP will depend on your age, goals, and risk tolerance. There is no cookie-cutter solution that will suit everyone, so it’s wise to consult an experienced financial advisor. A financial professional can not only help you build a diversified portfolio within your TSP, but they can also help you create an overall plan and strategy to be able to retire on time. If you don’t already have an advisor helping you do just that, we at Grace Wealth Management Group are here for you. We invite you to schedule an appointment here, call me at (949) 631-3840 x2, or email jbang@cfiemail.com. We want you to be able to retire on time, so let’s get started now!
About Jim Peters
Jim Peters is an independent financial advisor and the founder of Grace Wealth Management Group, Inc., a full-service financial firm committed to helping people pursue their financial goals. With more than 24 years of experience in the industry, Jim combines his extensive knowledge with his genuine interest in helping people pursue financial independence. Beyond his experience, he is certified as both a Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®), meaning he has advanced training and knowledge in financial planning and insurance. Based in Irvine, California, Jim specializes in working with individuals, families, and businesses throughout Orange County. To learn more, connect with Jim on LinkedIn or visitwww.financialadvisorirvine.com.
_____________
(1) https://www.workitdaily.com/benefits-working-federal-government
(2) https://www.opm.gov/retirement-services/fers-information/eligibility/