If you’re a federal employee, there’s a good chance you’ve recently crunched the numbers on your finances as you evaluate the government’s buyout offer — to resign and receive about eight months of salary. In this article, we offer key considerations to help you make an informed choice if you are seriously weighing this unexpected decision.
For workers who have been in the federal government for some time, you may have accrued a constellation of retirement benefits and now face the task of assessing — very rapidly — whether you have the financial capacity to retire.
The cold, hard truth? There’s no easy answer — and it’s different for everyone.
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Federal employees have a combination of pension benefits, the Thrift Savings Plan, Social Security, the Federal Employee Retirement System (FERS) annuity (a time- and comp-weighted annuity), insurance options and, for longtime employees, possibly even the Civil Service Retirement System (CSRS). It’s complicated.
As a firm specialized in comprehensive financial planning, and with many clients in the federal workforce, Mercer Advisors helps families simplify this decision by outlining their immediate cash flow needs, their full range of government benefits and their specific financial plan for the years ahead — a plan that allows them to continue to pursue their financial goals.
In addition to crunching these numbers, we’ve identified five high-stakes decisions that federal employees contemplating retirement will need to make quickly, and which can’t necessarily be changed later.
1. When and how should I take my pension option?
The federal government offers spousal benefits in exchange for a reduction in your pension. The tradeoff means having a somewhat lower pension now in exchange for your spouse receiving a benefit for the rest of their life.
Typically, in exchange for a 10% reduction in benefits, your spouse will be entitled to a 50% survivor benefit pension. There is also an option to take a smaller reduction, such as 5% in exchange for a 25% survivor benefit pension.
The specifics of your situation will matter, and it’s worth modeling this tradeoff and considering it in the context of other retirement assets, pension benefits or Social Security benefits that would be available to your spouse.
2. Should I continue with government-provided health, life and long-term care insurance?
In many situations, federal employees have the option to continue paying premiums to receive key insurance benefits including health, life and long-term care insurance, even after retirement.
Not all are eligible, but those who are can continue health insurance via the Federal Employees Health Benefits (FEHB) program. This is often a good option, but you will want to consider if you have access through a spouse to a better plan. That could be a plan that saves you money: Perhaps their employer pays all premiums, for example, or the plan has better coverage.
Federal employees who use the Federal Employees’ Group Life Insurance (FEGLI) may also be eligible to continue their coverage into retirement, or to continue with reduced coverage.
Take the time to review your current premiums. Because some FEGLI premiums increase with age at five-year intervals, some employees are surprised to see how much higher they are than when they first signed up and may decide it’s no longer worth making those payments in retirement.
3. How does Medicare work with the federal employee health care program?
Federal employees who are age 65 have the option to keep their federal employee health care plans or switch to Medicare as their medical insurance. This can be a complex calculation because Medicare premiums are income-based. If your spouse is still working and is a high earner, the Medicare premiums will be accordingly higher.
If you do enroll in Medicare Part B, however, your Federal Employees Health Benefits can serve as the secondary insurance providers.
4. Should I keep my retirement savings in the Thrift Savings Plan (TSP) or roll them over to an IRA?
The TSP offers just five fund options. If you roll over your TSP into an IRA, you may have access to thousands of options including stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate investment trusts (REITs) and more.
But be careful: More options aren’t always better. The TSP may suit your investment objectives just fine, and it also offers extremely low fees. If the TSP’s options match what you need for your portfolio, then it can be a good option to keep funds there.
To take a simple example, a family who wants to invest in index funds may be better off keeping their assets in the TSP due to the low expense ratios in the TSP's suite of fund options. But if they're interested in mutual funds, sector ETFs or other products, they'd be able to access those only via an IRA.
5. When should I take Social Security?
Like any retiree, federal workers face the tradeoff of taking a reduced Social Security payment early or waiting until reaching full retirement age to receive a larger payment. The basic tradeoff is that if you wait five years to begin receiving payments, they’re larger, but you’ve missed out on receiving any payment for those five years.
Federal workers may not know that those retiring before age 62 may be eligible for a benefit called the FERS Annuity Supplement, which can function as a stopgap until you reach the age to claim Social Security. Most people will find it valuable to model this out.
Resources for federal workers considering retirement
If you think you might be able to retire but aren't quite sure, know that resources are available. The Social Security Administration (SSA) offers a range of calculators to estimate benefits, and FEGLI offers a calculator for various permutations of its life insurance benefits.
Even if you are confident that now is not the moment to retire, it’s never too soon to be aware of these considerations and begin the planning process with an adviser experienced in serving federal employees. Having a plan in place helps ensure continuity in your daily life and confidence in your financial future, with the flexibility to adapt as needed.
If there’s one overarching lesson to be taken, it’s that it’s prudent to be prepared for the unexpected in our financial lives.
The opinions expressed by the author are his own and are not intended to serve as specific financial, accounting, or tax advice. They reflect the judgment of the author as of the date of publication and are subject to change. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services.
Mercer Advisors is offering complimentary consultations to all federal employees considering the buyout offer.
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