It is clear there are a lot of mixed emotions as to what it means to be a federal employee these days. One’s happiness in his or her federal career can depend on personal circumstances. It can be tempting to consider the private sector as an opportunity for more green pastures.
Stay or Go?
Perhaps in some cases it is a worthwhile opportunity. It depends on what you are trying to do with your career.
Unlike any other job though, the federal workforce is varied across agencies. The advantage of considering this lateral move is to keep federal employment status while perhaps getting a fresh start.
So the question becomes, is it worth it? Is the move to the private sector so lucrative and exciting that the alternative is unacceptable?
In some cases it certainly is worthwhile for a variety of reasons. It could be closer to home or offer flexible and part time hours. Or perhaps a consulting opportunity for a contractor start up that has enormous potential is available.
From a financial planning standpoint however, it is important to keep in mind what leaving federal service means to your pension.
What is a Year’s Pension Credit Worth?
Have you ever calculated how much you would need to save to create the kind of income one additional year of employment earns you?
First, a couple of assumptions: We will use the FERS computations as opposed to CSRS since there are more people who may be able to relate these data to their personal circumstances. And, if you are CSRS but you have not yet started receiving your pension, you are probably close enough to retirement to have done some of these calculations.
Next we will use 1% of your final salary which implies you under age 62 at separation for retirement, OR age 62 or older with less than 20 years of service per opm.gov. This is because the math is easier than assuming you met the qualifications to receive 1.1% of your final high average 3 years of salary, although if you hit the qualifications for 1.1% the math looks better.
We will also assume a final average high 3 of $80,000, which, for the typical reader of FedSmith.com, is probably low, but we will be conservative.
1% of $80,000 is $800 per year plus some cost of living adjustments over time guaranteed for the rest of your life. Next, we need assumptions about what age you would be foregoing this annual $800 payment credit in exchange for the private sector, and at what age it would otherwise begin.
Let us say ages 55 and 62: If you left federal service at age 55, how much would you need to be putting away to equal the $800 per year lifetime income you are giving up that would start 7 years later? And we are not counting anything to do with the TSP here because that is separate, and, let’s hope, your private sector suitor offers an equivalent plan.
So What’s the Answer?
Using a variety of methods such as guaranteed annuities that start in the future, investment models, and income riders, the answer is about $15,000.
There are contracts in the private marketplace that, with a deposit of $15,000 or so, would guarantee a check of $800 per year for life and offer an increase on that payment according to fixed rates or the rate of inflation in the future.
Alternatively, if $15,000 were invested at a 5% net rate of return after any fees and taxes for a year period, it would grow to $21,107 over the remaining 7 years in your hypothetical private sector career.
Using the general 4% rule (which is by no means guaranteed to work) says that if you withdraw 4% of your retirement savings in your first year of retirement and increase that for inflation, you have a reasonable chance of having the asset outlive you. 4% of $21,107 equals $844.
$15,000 may not seem like much, but is that private sector opportunity lucrative enough that it would allow you to increase your retirement savings by this amount, beyond what you are already putting away? And, if so, will that increased cash flow remain each year for the remainder of your working career?
If that gives you pause, maybe there is a job posting on USAjobs.gov that has your name written all over it, and you get a fresh start at the same time, without giving up the benefits.
If you are considering a private sector move like this and would like me to apply your data to the calculation I performed above, email me and I’ll reply. Good luck to you no matter what you decide. It’s tough mapping out the rest of your life.
Securities offered through Triad Advisors, Member FINRA / SIPC. Advisory Services offered through Planning Solutions Group, LLC. Planning Solutions Group, LLC is not affiliated with Triad Advisors. PSG Clarity is a division of Planning Solutions Group, LLC.