Navigating the complexities of federal benefits is crucial for government employees approaching retirement. Many federal workers often seek clarity on how to optimize their benefits and make informed decisions about their financial futures. Given the intricate regulations and frequent changes, finding trustworthy and relevant guidance can be challenging.
As a financial adviser who specializes in assisting federal employees, I frequently address two critical questions. These inquiries highlight important aspects of retirement planning under the Federal Employees Retirement System (FERS).
Rolling Over the Thrift Savings Plan
One common question is whether to roll over a Thrift Savings Plan (TSP) into an individual retirement account (IRA) upon retirement or to maintain the existing plan. The TSP functions similarly to tax-advantaged 401(k) plans found in the private sector. It offers features like automatic enrollment, agency matching contributions, and catch-up contributions starting at age 50.
While the TSP can be advantageous during one’s working years, it may not be as appealing in retirement. The plan limits investment options to only five funds: C, S, I, L, and G. This restriction may hinder retirees looking to diversify their portfolios with assets not available in the TSP, such as certificates of deposit (CDs), annuities, or real estate investments.
Moreover, withdrawals from a traditional TSP are generally taxed as ordinary income. For individuals with significant savings in a TSP, this could lead to substantial tax liabilities during retirement. Those comfortable with the TSP’s structure may choose to remain with the plan. However, rolling over to a traditional or Roth IRA can offer greater flexibility and investment options. Engaging a financial adviser can provide insights into the potential benefits and drawbacks of either choice.
Understanding Survivor Benefits
Another vital question revolves around survivor benefits and whether to select an option that allows a spouse to continue receiving pension payments after one’s death. Federal employees typically have three choices regarding survivor benefits.
The first option provides a 50% survivor benefit, ensuring that the spouse receives half of the pension for their lifetime. However, this choice reduces the employee’s monthly payments by 10%. If the spouse passes away first, the pension returns to its full amount, though the lost funds during the spouse’s lifetime are not refunded.
The second option offers a 25% survivor benefit, which results in a 5% reduction in monthly payments. This option is less burdensome than the 50% choice but still requires careful consideration.
Finally, employees can choose the self-only option, which does not reduce monthly payments but offers no benefits to the spouse upon the employee’s death. This choice also means the spouse would lose health insurance coverage under the Federal Employees Health Benefits (FEHB) program. Each of these decisions involves trade-offs that warrant thorough discussion with a financial adviser familiar with FERS.
For many couples, life insurance can provide an effective strategy to replace lost pension income and cover health insurance costs if the spouse has not yet qualified for Medicare. Life insurance policies often offer tax-free benefits to the beneficiaries and can include long-term care options.
Acquiring accurate and reliable information about federal benefits is essential for successful retirement planning. The U.S. Office of Personnel Management (OPM) offers a comprehensive FAQ section on its website, serving as a useful starting point. When faced with important financial decisions, consulting with an experienced professional can help individuals make the most of their earned benefits.
This article was informed by insights from Kim Franke-Folstad and is part of Kiplinger’s Adviser Intel program, which connects readers with trusted financial experts. As regulations and options evolve, staying informed is critical for federal employees aiming to secure a successful retirement.
