The holiday season is here, and with it comes one of the most popular times of the year for federal employees to retire. There are many good reasons for retiring at the end of the year, including annual leave accrual and payment, annuity payment timing, and frankly just another good reason to celebrate.
While all the paperwork may be turned in and everything set, there are still some things you should look at before you actually walk out the door for the last time. Even if you’ve made some of these decisions already, keep in mind that you can still modify them now if you’ve changed your mind or feel like you were rushed into making them before.
Have a comfortable retirement income plan.
In other words, make sure you can actually afford to retire. Most eligible federal employees can work out a reasonably comfortable retirement plan, but it does sometimes involve a lifestyle shift, employment in retirement, or other accommodation. If you aren’t prepared for or expecting the adjustments you may have to make, it can be quite a shock. One of the best things you can do when deciding on retirement is to make sure that your eyes are open as to what your financial life will look like after you’re no longer working. If you are not comfortable evaluating everything yourself, an advisor can help you work through the details of your federal annuity, TSP, supplement, Social Security, IRA’s, private annuity options, insurance, employment, and other factors that can affect your retirement.
If you are married, it is also important to consider the effect of both spouse’s income and retirement planning. Even if a federal employee can reasonably replicate their take-home income in retirement, that doesn’t mean that a spouse can always do the same. Sometimes, it is necessary to modify retirement plans to make sure the lifestyle of the entire family can be maintained.
Have a short-term cash flow plan.
Even if your overall retirement plan is sound, that doesn’t mean that cash flow in the first year is going to go smoothly. Here are a few key points to keep in mind:
- You are eligible for an annuity your first full month in retirement (actual days vary for FERS and CSRS), but the check doesn’t come until the second month.
- Your initial annuity payment will be for an “interim annuity”, and will be less than what your final annuity amount will be. It will revert to the full amount when finalized by OPM, but the timing is dependent on their backlog. With the large amount of expected retirees, that could mean you won’t see the full amount for the better part of a year.
- For FERS employees, the FERS annuity supplement (based on social security) is not paid out until your case is finalized at OPM and you are receiving your full annuity.
- Even though both the annuity and supplement will not be received in full while OPM is finalizing the calculations, you will receive the difference that you were due once it is complete. This can be used to help replenish savings that were spent in the meantime.
- You will receive payment for any accrued annual leave typically two to four weeks after retirement.
- The TSP is not accessible for approximately a month after retirement, due to processing time at your agency and TSP. There may also be penalties for accessing the TSP if you retired prior to age 55. The final concern with regard to the TSP is the withdrawal restrictions, which require specific planning to make sure you can accommodate your overall strategy.
- If you are under age 59 ½, there may be penalties for accessing IRA’s or other tax-qualified accounts.
These delays in actual payment and account access restrictions create a significant need for cash liquidity immediately after retirement. It is a strange feeling the first time your paycheck is not actually deposited into your account, and there is no other income for a while. One way to alleviate that situation is to have an accessible account available for use until OPM completes their process.
If you do not have a savings account large enough for your needs, there are other strategies that can be employed. They include pre-retirement, age-based TSP withdrawals, 72(t) IRA withdrawals, and other less frequently used options. There are many limitations and concerns with these options as well, and they should be discussed with a qualified advisor before proceeding.
Know your plan with TSP.
The TSP is the largest liquid asset most federal retirees have, and is an important part of the overall retirement picture, along with the annuity and Social Security (for FERS employees). Once retired, there are many different options that can be considered for withdrawals or transfers. Those include monthly withdrawals, TSP annuities, IRA transfers, outside annuities, 72(t) withdrawal programs, and many others. You won’t be able to actually implement many of these until after retirement, but you can set a plan in place. Some options, particularly annuities, may have additional benefits that over time can be increased by making the contributions as soon as possible. Regardless of what your plan is, you should have it identified as part of the overall strategy before retirement so you don’t miss out on any potential options or benefits.
Consider your FEGLI options.
Those employees who still carry FEGLI coverage into retirement have several options with it. Both the Basic coverage and the additional options can be maintained, reduced, or eliminated. The first thing to look at when making a decision is your actual need for insurance. Once that is determined, cost becomes a large factor. At typical retirement ages, optional FEGLI coverage can be very expensive when compared to the private sector, and you should explore all of your options if you need a large amount of coverage. Also, the Basic coverage gets more expensive after retirement, as the government no longer contributes their portion of the cost.
You do have the option of reduced Basic coverage as well. One popular option is the 75% reduction to the Basic plan, where the coverage is reduced after age 65, but no premiums are ever due from then on.
Your coverage selection is an important decision, and shouldn’t be made without consideration of all of the options, including those outside of FEGLI if necessary.
Verify your FEHB eligibility.
The Federal Employee Health Benefit program is a valuable benefit to federal employees, and you should be familiar at least with some of the basic rules regarding taking it into retirement. Here are a few of the main issues, though you should consult someone familiar with the program if you have a particular concern:
- You must have been covered under FEHB for at least five years prior to your retirement date to keep it active in retirement. You also need to retire on an immediate annuity to be eligible. This typically covers normal eligible retirements as well as VERA authorized retirements.
- Coverage under Tricare counts towards the five-year requirement, but you are still required to be enrolled in FEHB at retirement to carry it forward. One common strategy is to enroll in FEHB just prior to retirement, and then suspend coverage (only available to those otherwise covered by a select group of plans, including Tricare). You would not be responsible for the premium, but could always re-enroll at any future open season if you determined that FEHB fits your current needs better than Tricare.
- If you would like your spouse or family to maintain FEHB coverage after your death, they need to be eligible for a survivor annuity and you must be on a family plan at the time of your death. There is no five-year requirement for the family plan, so it can be added at any open season, including after retirement.
Develop a strategy for Social Security.
Social Security is another important component of retirement income for FERS employees, and it comes with many different options available. The first consideration is when to begin receiving benefits. You are eligible at age 62, but the monthly benefits are increased for every year you wait up until age 70. Depending on the rest of your financial picture, there can be very significant advantages to delaying receiving benefits until an older age. This decision should be considered as part of your overall retirement income plan.
Married retirees also face additional options with regard to how each spouse files for benefits. There are many different strategies that can be employed, depending on the specific situation and what objectives are needed within your overall plan. For example, it often makes sense for the non-federal spouse to delay their filing, thus increasing their payments in the future. That would be beneficial if they outlive the federal employee and the federal annuity is therefore reduced to only the survivor’s benefit.
All of these strategy options should be discussed with a financial planner familiar with the Social Security system as well as your federal benefits, to help you get the maximum benefit possible out of this important program.
Consider a phased retirement.
This is a new program, and therefore unfamiliar to many retirees. It is not common, and therefore won’t be reviewed in detail here, but you can get additional information if you are interested at www.opm.gov/FAQS/search.aspx?q=phased+retirement.
Apply for after-retirement employment.
Depending on your overall long-term retirement income plan, you may be looking at other employment while retired from federal service. If this is an important part of your strategy, you should begin looking for that work as soon as possible. Given the current economic climate, it may take longer than expected to find something suitable. As you consider your options, be sure to factor in the effect of the earnings on both your Social Security and the FERS supplement benefits.
Take a deep breath and enjoy the moment!
Retirement is a time of many changes, both financially and in the day-to-day routine. Despite the usual celebrations of no longer having to go to work, there can be a large amount of stress that accompanies the newfound freedom. It is very important to relax and enjoy the moment, and having a plan ahead of time that you are comfortable with can relieve a large burden from your shoulders.
As a final note, please keep in mind that all discussions here were aimed at the majority of federal employees, and there will always be particular exceptions. If your case is a less common situation, you should definitely work with someone familiar with the finer details of the system to answer specific questions.