With all the recent gossip, scuttlebutt, and lies being spread about government employees and their benefits, it’s no wonder federal employees ended 2011 a little tired and overwhelmed.
What can you expect in 2012 – more of the same or a reprieve from the attacks of the media and Congress? While no one can know for sure, there are some considerations you can take into account to help you be prepared for whatever the future brings.
The most likely changes that could affect federal benefits in 2012 include:
Changing from High 3 to High 5 for the calculation of federal pensions – This proposed change causes more federal employees to threaten to retire than any other. With the current pay freeze in effect for federal workers, depending on when you plan to retire this change might have little or no impact on your pension.
If you plan to retire at the end of 2014, for example, and the current pay freeze was extended for three more years (another proposed change), the High 5 vs. High 3 would have no impact on your annuity. Even without an ongoing pay freeze, a federal worker making $96,001 in 2010 who received an average COLA of 2% in 2013 and 2014 (we already know your pay was frozen for 2011 and 2012), would have a High 3 of $97,933. Using the same scenario, the High 5 would drop to $97,160.
With 30 years of service, the High 3 scenario would provide an annuity of $29,379, and the High 5 annuity would drop to $29,148. This annual difference of $231 amounts to less than $20 a month difference – probably not a deal breaker in your overall retirement plan.
Extending the pay freeze through 2015 – While no one wants to think about not getting a raise for five years, the real impact is on your retirement, because it ultimately affects your High 3 down the road. If you are stuck at one salary for five years, even when you do get a raise, your High 3 will be lower than it would have been with COLA’s.
It has a compounded impact on FERS employees who retire before age 62, since they do not get any cost of living increases prior to age 62 on their pensions. A FERS worker who retires at 56 and has had their pay frozen for a few years prior to retirement, not only has a lower High 3 but might go 8-10 years without any increase to their earnings!
Contributing more to your retirement system – Another proposal is to increase the amount of retirement contributions by .5% a year for three years beginning in 2013. This would result in CSRS contributing 8.5% and FERS contributing 2.3% to their retirement in 2015 and beyond. For employees who are eligible to retire in 2013 or thereafter and considering when to leave, this is another item on the “reasons to retire” side of your list. You would be contributing more, without getting any benefit in the calculation of your annuity.
In combination with a pay freeze, this amounts to a reduction in pay. If you aren’t eligible to retire between 2013 and 2015, there’s really nothing to consider here. You would pay the increased contribution and live with it.
Thrift Savings Plan – There aren’t any current proposals that would affect your TSP; however, this is the place to help offset some of the negative implications of the proposals listed above. With 2011’s lackluster returns, your initial inclination might be to shy away from saving more in your TSP.
This might be the right answer for your planning…and it might not. Understanding that everyone’s situation is different, you need to assess how the TSP fits into your overall retirement plan. If your annuity is going to be smaller due to any of the factors indicated above, how much does your TSP have to compensate for those reductions?
Some general guidelines for the Thrift Savings Plan include:
- Making sure you’re contributing at least 5% if you’re in FERS (to get the government’s match)
- Save 10% of your salary as soon as you can (that’s you saving 10% – not saving 5% and getting the 5% match)
- Have a strategy for allocating your TSP that includes targets when you would move into and out of the equity funds
- With the Roth TSP becoming available in early 2012, you’ll also want to understand how the Roth will differ from your traditional TSP and how to maximize its functions
Understanding how any benefits changes might affect you personally is the most important factor in deciding how to manage the things that are in your control. While you can’t control whether Congress votes to change your benefits, there are certain things affecting your retirement within your control:
- When you retire
- How much you save
- Maximizing returns on what you’ve already saved
- Where to save (within TSP or in other outside investments)
- When to take Social Security (for FERS)
Evaluate your numbers, goals and personal situation. Is 2012 the year you take control of your financial future?
Should you retire in 2012? The Magic Eight Ball says…
Watch for Ann Vanderslice’s latest book, “FedTelligence – The Ultimate Guide to Mastering Your Federal Benefits,” scheduled to be released later this month.