10 Ways to Maximize Your Federal Benefits In The Middle of Your Career

The author outlines ten things you can do now to make the most of your federal benefits.

You may not be counting down the days until retirement yet, but it’s never too early to start thinking about how to prepare.  It is even more important to make sure you’re doing the right things now, since there is still time to make a meaningful impact.  You may even find that your eventual retirement does not have to be as far away as you thought.

In addition to retirement planning, there are also things you can do to help protect what you’ve earned so far.  It is crucial to make sure your family is adequately taken care of, and ensure that you are getting all of the benefits you are entitled to.

Here are 10 things you can do now to help make the most of your federal benefits:

1 – Take the Free Money

For all FERS employees, a 1% automatic contribution is made to your TSP account whether you contribute or not.  For your first 3% of elective contributions, the government matches your amount dollar for dollar.  For the next 2% of elective contributions, the match is fifty percent.  The net result is that an employee contributing 5% of their pay will get an additional 5%, for a total of a 10% contribution.  There is no other investment, in TSP or anywhere else, that will see your money immediately doubled.  If you are FERS and not contributing at least 5%, that change should be at the top of your list.

2 – Be Responsible For Your Own Retirement

All federal employees, especially those in FERS, should be taking steps to control for themselves their expected lifestyle in retirement.  Your social security and FERS annuity will be calculated using fixed formulas based on your service, but the third leg of the retirement stool, the TSP, is completely under your control.  Increasing your TSP contributions can have a two-fold benefit for you at retirement.  The first is that your account has a chance to grow larger and provide for a larger retirement income.  The second is that your current budget is slightly smaller, meaning that you need less at retirement to maintain the same lifestyle going forward.  Both effects working together can have a significant impact on your ability to retire comfortably.

How much should you save?  The easy answer is to say that you should save as much as you can afford to.  You’ll need to put together a more comprehensive financial plan, though, to get a feel for how much you actually need to save to end up where you want to be.  You may not be able to hit your target at first, but at least you’ll know what you’re shooting for.

If you find yourself needing to increase your TSP contribution levels, here are a few ideas:

  • Raise your contribution any time you get a pay increase (eventually!).  That way you can save more without feeling a pinch in your regular budget.
  • Work to make small increases in your savings level over time.  A large withholding change may feel too restrictive at first, and cause you to give up and lower it again.  Increasing the level slowly over time, though, will allow your budget to adjust naturally.
  • Take any budget savings you are able to achieve elsewhere and apply those to your investments.  For example, if you pay off a car loan, continue to transfer the same amount as the payments used to be to the TSP.

3 – Realize What You Already Have, and Invest Accordingly

Investing in the TSP for a federal employee may feel a lot like a 401(k) for a private sector worker, but there are a few key differences to keep in mind while making your investment selections.  Most other people are basing their entire retirement income on their savings and social security.  For a federal employee, though, there is also a federal annuity component.  That piece has value, and should be counted as part of your overall allocation.

As a simple computation, many people recommend a safe withdrawal rate of around 4% for a portfolio that accounts for inflation.  To take a stream of inflation-adjusted payments, like a federal annuity, and back that out into a portfolio value, you would multiply by 25.  That means that if your annuity is projected to be $1,500 per month (or $18,000 per year), it is worth roughly the same as an investment portfolio of $450,000.  Considering that the annuity is guaranteed by the federal government, it could be considered a very low-risk investment.  When looking at your overall investments, like TSP, don’t forget to add in the present-day value of your future retirement annuity as a conservative option.  For most people in their early to mid-career, that means that a little more risk can be taken on with the other investments than might otherwise be recommended.

4 – Keep It Simple

Everyone has heard the stories of someone in the office who always seems to make the right call when moving in and out of various TSP funds.  It’s easy to be jealous, and to want to achieve the same feat for yourself.  Here is the dirty little secret about that, though:  Nobody brags to their friends and coworkers about the trades that haven’t worked out!

Many investors suffer as a result of poor ‘in and out’ timing, and would do better by developing an appropriate overall allocation to stick with (considering risk tolerance and time horizon). Over time, though, that appropriate allocation will change, and some management is still required.  The answer for those who don’t want to take that task on themselves is to simply keep their accounts in an appropriate L fund that will let the allocation evolve over time.  There are several L funds to choose from, and you can look into the current and projected allocation for all of them on the TSP website at www.tsp.gov.

5 – Consider the Roth TSP Option

New in 2012, the Roth option for TSP contributions can be very beneficial for those who have time to build that account and let it grow before retirement.  For some additional thoughts on the reasons to use the Roth, please see my previous article on that topic.

6 – Make Sure You and Your Family Are Eligible for FEHB

The Federal Employee Health Benefit program is one of the best health insurance plans available, and there is every reason to expect that it will continue to be in the future.  In order to make sure that you and your family will remain eligible for FEHB under all circumstances, there are a few things to keep in mind:

  • At retirement, you will only be eligible for keeping FEHB coverage if you are enrolled at retirement and have had it for the previous five years.
  • Tricare counts towards the five year requirement, but you still must enroll in FEHB before retirement.  If you would like to continue with Tricare as the primary coverage in retirement, you can suspend FEHB coverage.  You could then re-enroll at any future open season.
  • Your spouse and family are only eligible for FEHB coverage if you are
    enrolled in a family plan at death.  There is no length of time
    requirement for being on the family plan.
  • Upon the death of a federal employee, the surviving spouse and family are eligible for FEHB if they will receive a survivor annuity.  In most cases, that happens after 10 years in service.  A family plan would need to have been in place, however.

7 – Examine All of Your Life Insurance Options

One of the best ways to help protect and provide for your family if something happens to you is through life insurance.  You have many different options, both in the private sector and through the federal government.  The Federal Employee Group Life Insurance program, FEGLI, is a group term life insurance plan.  There are no medical exams, but you can only elect to add coverage when you start employment or after adding a spouse or child.  Coverage can be reduced at any time.  Costs for this plan will depend on your age, and adjust every five years.  For a more in-depth discussion of insurance requirements and options, please see a previous article on the topic.

8 – Keep Your Beneficiaries Current

There is a lot more to estate planning than just a will.  Many types of accounts and investment or insurance products have beneficiary designations, and those designations actually supersede the wishes expressed in a will.  FEGLI and TSP are both in this category for federal employees.  As an example, if your will states that everything you have goes to your children, but your ex-spouse’s name is still listed as your beneficiary on your TSP account, the account balance would go to your spouse.  It is important to regularly review all of your beneficiary designations, especially whenever there is a change in your family situation.

9 – Buy Back Military Time To Add To Your Annuity

If you have served in the military prior to entering service as a federal employee, you are eligible to ‘buy back’ that time and have it included in your retirement annuity.  The cost of a buyback will be based on your earnings during your military career and which retirement system (CSRS or FERS) you are currently in.  There is no interest required if the buyback is complete within the first three years of federal employment, and yearly interest is added after that.  For that reason, it is often best to begin paying on the service as soon as possible.

The larger question is whether or not it is worth it to pursue the buyback at all.  Every person’s situation will be different, and will vary based on length of service, military salary, civilian salary, retirement system, and several other factors.  An individual computation should be done for your particular situation by someone familiar with the programs, to help determine if a buyback is right for you.

10 – Don’t Underestimate the Impact of a Divorce

Divorce is a difficult and painful process, and can be devastating in many aspects of life.  Finances are no different, and most divorces leave both people worse off financially.  There are some additional considerations for a federal employee to be aware of, particularly as it relates to the retirement annuity.  Your divorce attorney may not be familiar with some of the rules surrounding federal benefits, and that could be costly down the road.  Properly valuing your benefits and understanding what affects them should be an important task for your representative team early in the process.

About the Author

Jason Visner is a financial advisor with Brook Federal Advisors, and works with federal employees to optimize their retirement benefits. The process starts with a complimentary analysis of the complete federal benefit package, and then builds an overall retirement plan on that foundation. He can provide recommendations on FERS or CSRS annuities, survivor benefits, military/LEO service, FEHB, FEGLI, TSP, IRAs, annuities, and social security. He can be reached at 262-456-5514 or brookfed.com.