All federal employees serve a valuable role in keeping the country moving, but some groups have an even more demanding job description. These include law enforcement officers, firefighters, and air traffic controllers, as well as other 6c designated occupations. These “special” groups have a different set of responsibilities than most civil servants, and therefore have a different set of benefits as well. There are several very important differences in their retirement systems that should be considered carefully throughout a career, especially when planning for life after federal employment.
One of the biggest considerations for a special group employee planning retirement is the mandatory retirement age. That limit is the age of 56 and 20 years of experience for air traffic controllers, and age 57 with 20 years for the other groups. This limit is due to the increased physical requirements of the positions, and is the reason why many of the other benefit variations exist. Exemptions can be given up to age 60 at the discretion of an agency head, or in order to meet the 20 year requirement. 6c employees can also transfer to non-covered positions and stay employed beyond their maximum age.
The ramifications of the mandatory retirement age can be significant. Some people aren’t ready to retire, either mentally or financially. Therefore, the planning process is moved up, and must be started earlier since there is not the option of simply working longer to help increase retirement benefits. Retirement itself also lasts longer, since it got an earlier start. Fortunately, the benefit calculations are modified to help account for these drawbacks.
The opposite side of a mandatory retirement is the option to retire earlier than other federal employees. Instead of having to wait until the mandatory retirement age (56-57), special group employees can retire at age 50 with 20 years of “good time” (6c service), or at any age with 25 years of good time service. For some people, this early retirement without penalty can allow for second careers, more time with family, or other options more attractive than working. In order to consider retiring early, though, you should have a thought-out plan for going forward, especially as it relates to both cash flow and long term income planning.
FERS Annuity Calculations
Under the FERS retirement system, special group employees pay in 1.3% of their salary to the FERS retirement system, as compared to 0.8% for regular employees. In exchange for the increased contribution, the annuity calculation is based on 1.7% of the high-3 salary for the first 20 years, and 1.0% after that. Regular employee calculations are based on 1.0% per year (or 1.1% if age 62 and 20 years are met). The increased benefit equates to 14% over a 20+ year career, and helps to compensate for the shortened career length. Also unlike regular employees, the annuity receives COLA increases from the start, rather than waiting until age 62.
Special group retirees are also eligible for the special FERS supplement, which starts at retirement and lasts until age 62. The earnings test for additional earned income also doesn’t take effect until the standard minimum retirement age (56-57). That allows for a full-time job with a higher salary for several years after federal retirement, without forfeiting any of the supplement.
The systems for both life insurance (FEGLI) and health insurance (FEHB) are the same for special group employees as they are for everyone else, but there is still some additional consideration that should be given. The cost of FEGLI, for example, goes up every 5 years for the optional coverage and goes up significantly at retirement when the government no longer pays their share of the Basic coverage. This may not be an issue for someone retiring at 62 who no longer needs the insurance, but an officer retiring after 25 years at age 48 may still have younger children and a much larger need for life insurance. Depending on age and health, it may be more cost effective to look at other options to make up the gap.
For those early retirees who do not go back to regular employment, their TSP investments may serve to help fill in the gap between their working salary and their retirement income. If that is the case, it is important to remember the rules to access the balance without penalties. If the retirement is in the calendar year that the employee turns 55 or later, any withdrawal can be made from TSP without penalty.
Withdrawals prior to age 55, however, may be subject to the 10% early withdrawal penalty. In order to avoid this extra tax, the primary option is to begin a “series of substantially equal periodic payments”. This can come from the TSP in the form of life expectancy distributions, or from an outside IRA in the form of a 72(t) distribution. This method should be planned carefully prior to beginning, however, as the distributions are not allowed to change (until age 59 ½) once they have begun. One possible option is to split the balance into two accounts, which will require an outside IRA. The regular 72(t) payments come from the first account, and the second account is held for emergency or other use. The regular withdrawals from the first account continue to avoid the 10% penalty, even if withdrawals are made (and penalty paid on those withdrawals) from the second account prior to age 59 ½.
Critical for all retiring employees in any category is short term cash flow. The annuity payment won’t show up for 5-8 weeks after retirement, and even then it will only be a partial interim annuity and won’t include the supplement until final calculations are complete. Add to this the limited TSP accessibility and it is easy to see why financial stress is often a large burden on new retirees, even if their long term plan is solid. One method for alleviating some of the pressure is to start planning several years prior to retirement. Many people have successfully provided for their short term needs by reducing their TSP contributions for a while (still contributing 5% to get the match!), and diverting the difference to a taxable investment account that can be drawn from later without penalty. It is a trade-off of tax deferral for immediate access, and can be of great assistance when done properly.
Long term planning is also important, especially when considering more than just the retiree. Spouses and their income and retirement should be considered, as well as any other expenses or income sources. The plan should be looked at as a whole as soon as possible, since corrections are much easier to make the earlier they are made. These adjustments could include some work after retirement, budget changes, etc.
Spending a career as a law enforcement officer or air traffic controller can be both challenging and rewarding. Shifting into retirement will be no different, but proper planning in advance can make the journey much smoother.