There is a lot of guidance out there on the federal benefit package for new employees starting their careers at a young age, but there are also unique and important considerations for those starting later. Here are some of the most common questions.
Should I buy back my military time?
For those people entering federal service after serving time in the military, this should be one of the first questions to review. Any time served in the military can be “bought back”, so that it can be applied to the formula for calculating the federal retirement annuity. The premise is that if you were a federal employee at the time, you would have had the same percentage of your salary (0.8%) taken out. In exchange for making a payment for that amount, those years would be added to your retirement benefit calculation.
The reason that a military buyback should be considered right away is that there is a three-year window after starting the civilian career that the military service can be bought interest-free. This applies even if the military time was many years prior. After the third year of service, however, the amount owed increases with an interest rate tied to inflation. If you have a long federal career before buying back the time, the interest cost is often significantly more than the original amount owed.
Military time can also be bought back even if you are already receiving a military retirement pension. You cannot collect two payments for the same time, however, so you would have to give up your military pension prior to receiving the federal annuity. You can collect the military retirement and your federal salary at the same time, however.
The calculations as to whether or not buying back the military time makes sense can be different for everyone. Typically, a lower military salary (lower buyback cost) and higher federal salary (greater increase to retirement annuity) make it an easy decision to buy the time back. There are also many other instances where the numbers work. It is a little tougher when you have to factor in the loss of an existing military pension, but even that can make sense in some circumstances. The key is to figure out the buyback cost and expected difference in benefits down the road, and decide what makes sense in your particular situation.
To begin considering your options, you should first get an estimate of the actual buyback cost (there is a calculator at the DFAS website). You can then put together a retirement estimate both with and without the military time, and make an informed decision about the buyback. I suggest looking at it right away, to help avoid potential future interest costs.
Should I take the FEGLI life insurance?
The first question to ask when considering the FEGLI options is whether you actually need life insurance. If you no longer have kids in the house, have enough assets outside of your federal retirement, and have a survivor annuity, you may find that you have no need for any additional protection. If that is the case, you usually do not need to take the insurance option. If you already have taken the coverage and now realize that it isn’t necessary, you can cancel at any time. You should review an overall financial plan before making the decision to cancel insurance, to make sure your dependents will be taken care of.
If you do need insurance, it is important to understand the various components of FEGLI. The first is the Basic option, which covers your salary (rounded up to the nearest thousand) plus $2,000. The cost of this coverage is shared with the government, and doesn’t change unless your salary does. For older employees, this tends to be a relatively good value. When carried into retirement, there is also the option of maintaining the coverage with a 75% reduction after age 65. The expense also goes away at 65, so the essence is a burial policy at no cost from that point forward.
There is also optional coverage to consider, especially Option B for higher coverage amounts up to five times salary. The optional coverage plans are a group term policy that adjusts in costs every 5 years. For older employees, the costs can end up being quite high relative to the offered coverage. The benefit, however, is that there are no medical requirements when signing up right away. For most people who need the coverage, it makes sense to take the appropriate FEGLI initially. At that point you can shop around for a potential term policy or other coverage that is more cost effective, and only cancel the FEGLI once the new coverage is in force. If there is a medical issue, the FEGLI can be maintained as long as necessary.
Should I take the FEHB coverage?
The Federal Employee Health Benefit program typically offers very good benefit packages at a reasonable cost. Most people opt for FEHB coverage for their entire family, with the possible exception of veterans covered under Tricare. Every situation is different, however, and the final decision should be based on your particular circumstances.
An added benefit of the FEHB program is the ability to continue the same coverage for life, even after retirement. In order to be eligible, you need to have carried the insurance for at least five years prior to retirement. That is important to keep in mind if you have been on a different insurance policy and are within a few years of retirement. There is an exception to the 5-year rule if you have been continuously covered under Tricare. A spouse is also eligible to be covered by the same FEHB policy even after a retiree’s death, provided there is a survivor annuity payable and the retiree carried a family plan.
How much should I contribute to TSP?
Since the institution of the FERS retirement system in 1984, the TSP has become a major part of the federal retirement package. That is especially true for people who start their careers later, and will have a smaller annuity calculation as a result. When determining the initial contribution level to TSP, it should be based in large part on an overall retirement plan, which would include retirement annuities, Social Security, both spouses’ savings, and any other income sources. That plan can help establish a budget for retirement, as well as the savings necessary to achieve it.
The recommended TSP contribution savings rate will vary with the retirement plan, as well as with household income, age, and other factors. There are a few general guidelines, however:
- Begin by contributing at least 5%, to take advantage of all of the matching funds from the government. A 5% contribution will result in an additional 5% of matching funds.
- Take advantage of pay raises, either through annual or step increases, to increase TSP contributions by a similar amount.
- If you can, max out your contribution. The limit is $18,000 per year for 2015, with an additional $6,000 “catch-up” for those over age 50.
- Consider utilizing the Roth option for some or all of your contributions. Whether it makes sense in your specific situation will depend on your overall tax bracket, future income projections, etc. If you are maximizing contributions already, keep in mind that Roth contributions are effectively larger, since they are made after-tax.
The bottom line is that it is in your best interest to contribute as much as you can. Not only does it increase your savings to be used for future retirement income, it also lowers your current budget. That makes the income target you need to hit in retirement that much lower. Taken together, contributing more to TSP makes a consistent lifestyle and budget through retirement much more feasible.
Should I transfer my old 401k into the TSP?
If you are coming from an earlier career where you have accumulated a 401(k) balance, you will have several options moving forward. They include keeping it in the existing plan, transferring it to an IRA, moving it into the TSP, and taking the money out. The last option, taking the money out, should be considered last, and only used in rare circumstances. Not only are retirement savings reduced, excess taxes and penalties may also be due.
It is important to remember that there is no deadline to move funds out of a 401(k), and you can take your time making the decision. Here are some important considerations to review:
- The internal expenses or the TSP are likely to be significantly lower than most 401(k) plans for the same investments. Expenses for an IRA can vary, depending on the investment choices.
- There is a benefit to simplicity, and you may want to move funds to the TSP to keep track of everything in one place.
- The TSP has significant restrictions on withdrawal flexibility. If you will be looking to access some of the funds prior to retirement, you may wish to keep part of the balance in an IRA. The exact strategy will depend on your age and timing requirements, but all options should be considered before submitting paperwork.
When will I be eligible to retire? Do I have to work for 30 years?
One of the significant benefits of a federal career is the retirement annuity, but certain age and service requirements must be met in order to receive that annuity immediately. For a federal employee starting later in life, reaching the 30-year mark is much less likely. Fortunately, there are other combinations that may be used for eligibility purposes. Those include the following:
- Age 60 with 20 years of service.
- Age 62 with 5 years of service.
- Full retirement age (between 55 and 57, depending on birth year) with 10 years of service. While immediately eligible, there are penalties if benefits are taken before age 62.
- Law enforcement officers, air traffic controllers, and other special groups have the opportunity to retire earlier than other employees, either at their full retirement age with 20 years or any age with 25 years.
For those people wishing to retire before the previously mentioned requirements are met, the penalties may be avoided by utilizing a deferred retirement. With a deferred retirement, the full benefit is paid, but not until a later date when the age portion of the requirements is met. If you elect a deferred retirement, FEGLI and FEHB benefits cannot be continued. If you are considering this option, your entire situation should be evaluated to see what makes the most sense for you.