Retirement Savings Tips for Federal Employees
by Jason Kay |
There are many benefits to working in the federal sector. One reason why many people choose to work in federal jobs is that they tend to offer better retirement benefits than the majority of positions in the private sector. If you take full advantage of the benefits while you can, even eight or ten years spent in a federal job can help boost your retirement income when it comes time.
If you want to retire in comfort, however, you need to have an active plan for saving for your retirement now, while you still hold your federal position. While you can do nothing and still have some amount of financial support when it comes time to retire, depending on how long you’ve worked in the federal sector, the system works best when you actively plan and contribute to your own retirement.
Here are a few tips to help you make the most of your federal retirement benefits.
1) Understand the Benefits
The first thing you need to do as a federal employee is make sure that you understand your retirement benefits, and how they work. Federal retirement benefits are a three-pronged system that is designed to provide a pension and Social Security benefits for long-time employees, but also to help you save for your own retirement.
Known as the Federal Employees Retirement System, or FERS, your retirement benefits are made up of 3 parts:
- The Basic Benefit Plan,
- Social Security, and
- The Thrift Savings Plan, or TSP.
The Basic Benefit Plan is your pension with the federal government, which you are eligible for once you have worked there for five years. Unlike the other two pieces to the puzzle, you must be working in the federal sector when you retire in order to take advantage of it. (Your benefits with Social Security and the Thrift Savings Plan can be taken with you if you take a different job.) Your contributions to the Basic Benefit Plan are automatically deducted from every paycheck.
The amount you get from the Basic Benefit Plan is based on your salary, the number of years you worked in the federal sector, and what age at which you retire. In other words, the longer you work for the government, the better your pension will be. The pension is calculated by taking 1 percent of the average salary for your three highest-paid consecutive years, and multiplying it by your total years of service. If you put in at least 20 years and work until you are 62 or older, however, the pension is figured using 1.1 percent of the average of your highest-paid years, instead of just 1 percent.
The Thrift Savings Plan, or TSP, on the other hand, operates like a 401(k). If you don’t do anything, the government will give you an amount equal to 1 percent of your basic pay every pay period, deposited into your TSP account. Like many big companies do with their employees’ 401(k) accounts, some agencies will also match your contributions to your TSP account, up to a certain amount. For instance, they will match 100 percent of your contributions up to 3 percent of your pay, and 50 percent of your contributions up to 5 percent of your pay.
Because you make before-tax contributions to your TSP account, reducing your tax liability for the year, there is an annual cap on how much you can contribute. In 2011, for example, you can only contribute up to $16,500. If you are 50 or older, however, you are allowed an additional $5,500 in “catch-up” contributions throughout the year.
Much like a 401(k), you have some choices in how to invest your money in your TSP account. Currently there are 10 different funds to choose from, and you can change how you have invested your money at any time. You are not taxed on the money in your TSP account until you withdraw it, presumably starting at retirement age, as you will incur penalties if you make withdrawals too soon. You can start making a limited amount of withdrawals at age 59 ½ without having to pay any penalties, and at age 70 ½ you can withdraw freely without paying any penalties at all.
2) Take Advantage of Employer Match
One of the most powerful advantages to the TSP is the employer match. This is essentially free money from your agency; even though you won’t be able to use this money for years to come, it’s essentially a bonus on top of your regular salary, and it’s earning interest as we speak.
Remember, the agency pays 1 percent of your basic pay into your TSP account every pay period. On top of that, if you contribute 3 percent of your pay to your account, most agencies will match that amount by 100 percent. If you contribute 5 percent of your pay, on the other hand, they will match the first 3 percent at 100 percent, and the next 2 percent at 50 percent, for a total of 4 percent of your pay. When you consider the base 1 percent that you are given before making any contributions, your agency will essentially give you an extra amount equal to 5 percent of your pay toward your retirement every pay period — IF you take full advantage of the employer match.
3) Know Your Limits
Once you take advantage of the employer match on the first 5 percent, the only benefit of contributing more of your pay toward your TSP account is that you will be lowering your taxable income from the year. There is a cap, however, on how much you can contribute to your TSP account in a one-year period. In 2011, for example, you can only contribute a maximum of $16,500 to your account. If you are 50 or older, you are allowed an additional $5,500 a year in “catch-up” contributions; however, these contributions must be designated as such, and spread out throughout the year, as your TSP account will simply stop accepting contributions once the regular $16,500 limit is reached.
It is important to know your limits, and to plan your contributions for the year accordingly. If you want to take full advantage of the employer match, you won’t want to contribute too much per pay period. Your agency matches up to 5 percent contributions each pay period, so if you contribute too much and reach your $16,500 limit, say, halfway through the year, you lose the employer match on the remaining half of the year. That’s six months of employer contributions you are missing out on!
4) Make Career Decisions with Your Retirement in Mind
The impact on your retirement should be a major consideration in every career move you make. How long do you plan to work in your job? Will a job move be beneficial to your retirement, or will it hurt it? For instance, as a federal employee, your TSP plan earnings and the non-matched 1 percent employer contributions are only vested after you have worked in the federal sector for two or three years.
What are you giving up if you take a job in the private sector? What do you have to gain if you remain a federal employee? There are questions to ask yourself before making any significant decision about your career. It is important to make sure you have a plan for your retirement, and that any career change you make will benefit your future, or at least not hurt it.
Retirement is an important, and for some people, scary time in your life. As we get older, we need to have a system in place — a pension, savings, or generous children — to take care of us when we are no longer able to support ourselves. As a federal employee, the best way to make sure you are prepared for your retirement is to understand how you can make the most of the benefits available to you.
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