How can a Federal Employee Maximize Their Retirement Outcome?

How can a Federal Employee Maximize Their Retirement Outcome?

June 05, 2024

Check out my article published in Fedadvisory...

How can a Federal Employee Maximize Their Retirement Outcome?
by Richard Bavetz, FRC℠ June 5, 2024

There are specific considerations for federal employees looking to maximize their retirement income and understand retirement income tax strategies given the unique nature of federal retirement systems like the Federal Employees Retirement System (FERS) or the Civil Service Retirement System (CSRS).

Here’s a short outline for federal employees to focus on:

Maximizing Retirement Income
Maximize Your TSP Contributions: The Thrift Savings Plan (TSP) is a key component of your retirement savings. Make sure you’re contributing the maximum amount allowed, or at the very least contributing enough to receive the full matching contributions (5%) if you are a FERS employee. Consider the Roth TSP option for tax-free withdrawals in retirement.

Understand Your Pension Benefits: Both FERS and CSRS provide pension benefits, which are based on your years of service and salary. Familiarize yourself with how your pension is calculated and what steps you can take to maximize this benefit, such as ensuring you reach key service milestones.

Strategize the Deployment of Social Security Benefits: If you are under FERS, you are eligible for Social Security benefits. Delaying the start of these benefits beyond your full retirement age can significantly increase your monthly benefit. However, keep in mind that money not received during the time benefits were delayed, must be recovered. That takes time… sometimes as long as 10 or 12 years to break even (recover what one would have received during those years). On the other hand, Starting benefits as early as possible can have advantages as well, particularly if you're still working.

Consider Working Longer: Extending your federal career can increase your pension benefits, allow more contributions to your TSP, and potentially increase your Social Security benefits.

Manage Your TSP in Retirement: If you retire at Minimum Retirement Age (MRA) or younger, you’ll need to leave some or all of your money in TSP until you reach 59 ½ to avoid penalties unless you are a Special Provision/Public Safety Employee. Seek out the most advantageous Distribution Options you can find. Remember, the TSP is designed to act as the “Third Leg” to your Retirement “Stool” so plan your withdrawals strategically to meet your income needs while being careful not to run out of money. Most of all, get professional guidance.

Retirement Income Tax Strategies
Tax Efficiency in Withdrawals: Understand the tax implications of withdrawals from your TSP account. Traditional TSP withdrawals are taxable, while Roth TSP withdrawals are tax-free in retirement as long as you’ve had the Roth for at least 5 years or you're at least 59 ½ years old, whichever is longer. Plan your withdrawals to minimize your tax liability, possibly starting earlier than you need to, and spreading them out over a longer period to stay in a lower tax bracket. Seek guidance from a tax professional.

Minimize Taxes on Federal Pensions: Your federal pension will be subject to federal income tax, but you can manage your tax situation by considering state residency (some states do not tax federal pensions) and by making strategic withdrawals from other accounts to remain in a favorable tax bracket.

Optimize Social Security Taxation: Up to 85% of your Social Security benefits may be taxable depending on your total income. Manage your withdrawals from other retirement accounts to minimize the taxation of your Social Security benefits.

Utilize the Roth TSP: Contributions to the Roth TSP are made with after-tax dollars, later the withdrawals will be tax-free in retirement as long as you follow the IRS’ distribution rules. This can be particularly advantageous if you expect to be in a higher tax bracket in retirement. Some may laugh when they hear that, but a federal employee who plans well and saves well can more often than not, expect to get a raise when they retire.

Health Care and Tax Considerations: Leverage the Federal Employees Health Benefits Program (FEHB) in retirement for healthcare needs, and consider the implications of Medicare. Health Savings Accounts (HSAs) are not directly offered through federal employment but managing healthcare expenses efficiently can also have tax advantages.

Consult a Professional such as a Federal Retirement Consultant℠ (FRC℠): An FRC℠ is a professional specializing in Federal Employee Retirement planning and advice. Because they are certified in the Federal Employee Benefits plan, they can offer personalized advice on maximizing your retirement income as well as utilizing all of the benefits offered, based on your specific situation. Federal Employee Benefits are very valuable but are extremely complex. Each benefit should be utilized to the greatest advantage possible by the Federal Worker so they don’t leave anything behind.

General Tips
Stay Informed. Keep up with changes to federal retirement benefits, TSP contributions limits, and tax laws. Be mindful of inflation as it can creep up on you. Because of the federal pension benefits, there are typically no state government options available to assist a former federal employee with potential Long-Term Care needs. The Federal Long-Term Care Insurance Program (FLTCIP) offers another layer of financial protection that may help extend a federal retiree’s retirement savings and lift some or all of the financial burden off of other family members.

Federal employees have a robust set of benefits available to maximize retirement income and navigate tax implications effectively. By taking full advantage of these resources and planning strategically, you can secure a comfortable and financially stable retirement. Playing it smart by working with a professional to assist in your retirement planning can make a huge impact on the success of your planning.

Rick Bavetz is a Federal Retirement Consultant℠ and has been helping Federal Employees understand their employee benefits for over 15 years. Rick has provided Benefits Briefings, Workshops, Training, Employee Benefits Assessments, and Exit Planning to employees of various Federal Agencies on how to maximize the outcomes of their Federal Service by utilizing their Federal Employee Benefits plan to its fullest.

Serving the Following Agencies:
Veteran’s Affairs, CBP, DEA, DHS, DOJ, DCMA, EEOC, FAA, FDIC, FTC, IRS, SSA, USDA, USPS, Army & Navy, and others.

Richard Bavetz, FRC℠ is a Fiduciary, and holds a Series 65 securities license, various State Insurance Licenses, and a CA Real Estate License. Federal Employee Benefits Assessments, Financial Planning, Retirement & Insurance Consulting Services, are offered through Carington Financial. Advisory services are offered through J.W. Cole Advisors, Inc. (JWCA). Carington Financial (CF) and JWCA are unaffiliated entities.