As federal employees, we have some benefits that most other workers do not. If we are working with a financial planner who is not familiar with our benefits, we risk getting advice that does not fit our situation.
I would hope that most planners within the Washington, DC metropolitan area would have a clear understanding of federal benefits and retirement, but there is no such assurance as you get out of the DC metro area. Indeed, many planners in cities that have large concentrations of federal employees (e.g., New York, Atlanta, Chicago, Los Angeles, etc.) may be clueless as to important distinctions between federal and non-federal employees and retirees.
Below we will look at several things of which your financial planner should be made aware.
Let’s start with the basics. Both CSRS and FERS are defined benefit pensions that are significantly different from the defined contribution plans (such as 401(k) plans) that are prevalent in the retirement plans of most private sector companies. All federal employees who have at least five years of civilian service are vested in a “good old-fashioned pension”.
Our pension benefits are not dependent on the performance of stocks or bonds.
Rather, our pension benefit is defined by our length of service and high-three years of salary. Your length of service will give you a percentage factor that is multiplied by your highest three years of salary to give you an annual annuity.
Your federal pension must be taken in the form of an annuity.
There is no lump-sum distribution option available in either CSRS or FERS. Do not confuse the possibility of having your contributions returned to you in a lump sum, should you have nine months or less to live with the common private sector option of taking a large cash payment in lieu of an annuity. (Think of the cash payment value of a Powerball jackpot as an example of a lump-sum distribution). Your CSRS or FERS annuity will last you the rest of your life; no more and no less. You have absolutely no danger of running out of money before you run out of time.
Your CSRS or FERS annuity comes with a cost-of-living adjustment (COLA).
Most of the remaining private sector defined benefit plans do not have COLAs. CSRS retirees begin earning a full COLA (based on the Consumer Price Index for urban wage earners known as CPI-W) when they retire. The FERS COLA is not fully indexed to the CPI-W and may trail it by as much as one percentage point. Most FERS employees must wait until age 62 to begin earning a COLA but there are exceptions for law enforcement officers, firefighters, disability retirees and air traffic controllers.
Yet another item of which financial planners need to be made aware is that there is a link between choosing a survivor benefit for your spouse and that spouse’s ability to continue enrollment in the Federal Employee Health Benefits Program (FEHB). If you do not elect at least some level of survivor benefit and die before your spouse, your spouse will be ineligible to continue enrollment in FEHB. There is a major exception for those of you who are married to another federal employee or retiree; your spouse will be entitled to FEHB in their own right and will not require a survivor benefit to allow them to continue enrollment.
This FEHB/survivor benefit link is especially important for your planner to realize, as otherwise he/she may try to sell you life insurance in lieu of your electing a survivor annuity for your spouse. This is called “pension maximization insurance” and may make sense in some situations, but not if it excludes your spouse from FEHB coverage after your death.