After having had some time to digest the topics that were covered in the “10 Critical Coordinates for Navigating FERS Retirement (Pt 1), I hope you are ready for more!
In part 1, we discussed the need to work with a well-informed Federally Focused Financial Advisor or Chartered Federal Employee Benefits Consultant and also discussed concerns about potential future tax rate hikes and how the Roth TSP in conjunction with a Roth IRA can be utilized to help mitigate that risk.
Let us delve further into the discussion by looking at some important benefits you have as a federal employee. Jumping right in…
Coordinate Number 4: Coordinate your TSP Allocation & Risk Tolerance
The TSP is a great Retirement Accumulation Vehicle. A simple set of index options and incredibly low fees are the two cornerstones of the Thrift Savings Plan (as well as the Roth TSP). Younger Feds, or those who actively watch the markets, are generally more comfortable with an aggressive TSP allocation, leaning heavier into the C, S, & I funds. Historically, they have had higher returns but come with much more volatility (just look at recent weeks!).
Later as Feds transition towards retirement, many understand the need to get more defensive with their allocation, relying more on the conservative returns and low volatility of the G and F funds. The Lifecycle Funds (L Income, L2020, L2030, L2040, L2050) are comprised of the other 5 accounts and make these allocation adjustments for participants based on the date the fund is targeting.
While the L Funds can be beneficial to many Feds, remember, there is no “set it and forget it” retirement plan. It may be best to work with a guide to review your entire asset portfolio, covering your TSP and beyond, in order to discuss your risk tolerance and achieve the proper balance! Important note: Lifecycle fund’s allocation glide path does not take into account “Black Swan Events” such as 9/11 or the recent “Brexit”.
Coordinate Number 5: Coordinate your Spouse’s FEHB and SSB
Behind your pension, the FEHB is the single largest benefit the government provides you. As a Federal Employee, the government offers a number of approved plans while also picking up about 72% of the plan’s premium, leaving the Fed only paying roughly 28% of what it would normally cost. If your spouse does not qualify for the FEHB themselves, then you need to select at least the minimum Surviving Spouse Benefit for them to be eligible to continue qualifying for the FEHB in the event of your passing.
That being said, many Pension Maximization Strategies correctly point out that the cost of the full Survivor Spouse Benefit (10% of your pension) is unreasonably high for the incredibly narrow scope of benefits the SSB provides.
For the majority of married Feds, coordinating the minimum SSB (simply to insure the spouse maintains access to FEHB coverage) with Pension Maximization Strategies will save them money in their retirement income, create access to tax-free emergency funds through Living Benefits, accumulate cash value, and provide the spouse with more flexibility on how they receive their money (lump sum or lifetime income). If continuing the spousal FEHB is not a concern for your spouse then it is even more important you compare the cost and inflexibility of the SSB with Pension Maximization Strategies!
Coordinate Number 6: Coordinate your FEGLI & Personal Health
The FEGLI program is age-based group term life insurance. Every birthday that ends in 5 or 0 will include the gift of higher FEGLI premiums, for everybody across the board, regardless of your individual health or habits.
The FEGLI is designed to provide protection inexpensively early in your career (when you’re least likely to need it) but becomes incredibly expensive in retirement (when you are most likely to utilize it and have the tightest budget). From age 35 to age 65, the FEGLI premiums increase 2067% regardless of whether you are a marathon running dietician or a chain smoking alcoholic. (Feel free to verify this yourself with OPM’s FEGLI Calculator using age 35 and 65).
This generally means that, unless you have major health concerns, you can save money & improve access to your coverage by replacing the FEGLI sometime after the Basic Extra Benefit ends at age 45.
The optional portion of the FEGLI coverage offers no Living Benefits. These are critical features today, allowing the owner to double and triple utilize their Life Insurance policy through riders that enable it to act similarly to other common coverages such as Long-Term Care, Short-Term Disability, and Cancer policies etc. Important note: while FEGLI premiums only increase every 5th year, the cost of starting any alternative plan increases each year we get older, so don’t put off reviewing your options.
Coordinate Number 7: Coordinate your LTC & Living Benefits Life Insurance
This topic is explored in detail in another of my articles, but Traditional Long Term Care plans are both expensive and restrictive in terms of what medical invoices their “Reimbursement Model” will and will not cover.
Life Insurance plans today that include a “Chronic Illness Rider” allow tax-free access to your Death Benefit under an “Indemnity Model” which means, once you qualify, the money is yours to do with as you please.
When properly designed, paying the premiums for one life insurance policy can save you money while offering more flexible access to your benefits in comparison to the combination of purchasing both FEGLI and FLTCIP insurance separately.
Alright, how have Critical Coordinates 4-7 treated you so far? We have covered a lot of information already – not to mention the other important articles that were referenced in Part 2 here. In the last part, we will conclude with the final 3 points.
