I'm a Financial Pro Focused on Federal Benefits: These Are the 2 Questions I Answer a Lot

If you're a federal employee, understanding how to optimize your many benefits before transitioning to retirement is critical to achieving long-term success.

Yet, finding clear and trustworthy guidance that's specific to government workers, and the programs for which you're eligible, can be challenging.

Interpreting the myriad regulations that govern federal benefits has always been difficult, particularly when it comes to retirement. It can be tough to stay up to date with regulations that are subject to change at any time.

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Getting timely answers can be a struggle

Since there isn't a single agency in charge of everything and everyone, it can take time to track down valid answers that pertain to your individual circumstances. (Time you likely don't have if you're still working.)

As a financial adviser who frequently consults with government workers, I can appreciate the struggle. Creating plans that optimize their unique benefits has become an important part of my practice.

Many variables can affect a federal employee's future, so it's no wonder clients and prospective clients often come in with a long list of questions when we meet.

There are two topics that come up repeatedly that I think are especially critical. The questions I hear most often are:

1. Should I roll over my Thrift Savings Plan (TSP) in retirement or stick with the plan I have?

The TSP is similar to the tax-advantaged 401(k) plans available in the private sector — and it can be a great plan when you're still working.

It makes investing easy with automatic enrollment, matching agency contributions, catch-up contributions starting at age 50, a Roth option and more.

But once you reach retirement, the TSP can lose some of its luster.

For one thing, the plan doesn't offer as many investment options as you'll find within a traditional or Roth IRA. It has only five funds to choose from (C, S, I, L and G).

Some investments that are popular with retirees can't be purchased through a TSP. These include certificates of deposit (CDs), annuity safe-growth accounts and assets such as real estate. This can make diversifying your risk in retirement more difficult.

There's also the question of the taxes with which TSP account holders will eventually have to deal. Just as with a 401(k), withdrawals from a traditional TSP are generally taxed as ordinary income. This includes contributions made with pre-tax dollars, agency contributions and earnings.

If you've stashed a sizable chunk of your savings in a TSP (unless it's a Roth option), you could be setting yourself up for burdensome tax bills in retirement.

If you're comfortable with the structure of the TSP, you might decide to stick with the plan. But rolling over your TSP to a traditional and/or Roth IRA is worth considering if you're looking for more flexibility in retirement.

A financial adviser can help you consider all the options available, run projections to determine whether a rollover makes sense for you, explain the various withdrawal choices if you stay with the TSP and assist you in making the appropriate moves when the time is right.

2. Should I choose the survivor benefit so my spouse can still receive pension payments if I die first?

When determining what portion of your pension, if any, your spouse will receive upon your death, you have three basic options.

You can choose for your surviving spouse to receive 50% of your pension for the rest of their life, no matter how long that might be. This security comes at a cost: If you make this election, your ongoing monthly pension payments will be reduced by 10%.

That can add up to a hefty sum over the years. (If your spouse dies first, your benefit will be restored to the full amount — but you won't get back the money you lost.)

You can opt for a reduced survivor benefit of 25%. This choice will cost 5% of your ongoing pension payments, which is a smaller, more manageable bite.

It still requires some math to determine if it's the right move. (Your benefit will go back to the full amount if you're the surviving spouse, but the money you gave up in exchange for the survivor benefit will be gone.)

You can go with the self-only option. The payments you receive while you're alive won't be reduced, but your spouse won't receive any payments if you pass first. They'll also lose the health insurance coverage you had under the Federal Employees Health Benefits (FEHB) program, which would remain in place if you chose a survivor benefit.

How might they feel about losing you, the reliable income from your pension and FEHB coverage all at once? That's something you'll have to discuss. If you go for this option or the reduced (25%) survivor benefit, your spouse will have to sign a notarized document agreeing to the choice.

As with any financial decision, there are multiple strategies to consider and numbers to run when making this important call.

Consulting with a financial adviser who understands the nuances of the Federal Employee Retirement System (FERS) can help clarify the trade-offs.

For many couples, we've found life insurance can be used to replace both the lost pension and cover the cost of health insurance if a surviving spouse hasn't yet qualified for Medicare.

Life insurance offers other benefits, as well. The beneficiary of the life insurance policy (often the surviving spouse) receives the money tax-free. Life insurance policies can also include long-term care options in which the death benefit can be used to pay for future care, instead.

Asking for help

I often compare getting useful FERS information from the government to trying to break into one of those confounding plastic "clamshell" packages. It's far more difficult and frustrating than it should be.

The U.S. Office of Personnel Management (OPM) has an extensive FAQ section on its website that can give you a good start.

But when you're ready to begin making the decisions that will impact the retirement you've worked so hard for, I recommend talking to an experienced professional who can help you make the most of the benefits you've earned.

Kim Franke-Folstad contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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