One of the primary reasons clients begin working with us is job change. Beyond just a change in employer, there is usually a change in salary, benefits are different and you’ve got to decide what to do with your retirement account.
Understanding the financial impact and making informed decisions can be challenging, and given the complexity of Federal government benefits, the challenge is even greater for those employees considering jobs outside the government.
If you’re considering leaving the Federal government for employment elsewhere, it can be helpful to break the financial analysis into short-term impact and long-term impact.
Short-term, the fundamental financial question is what your take home pay will be. Overall gross pay might be higher, but there are a number of items beyond your gross salary that impact what you take home, including:
- Cost of healthcare benefits
- Availability of a retirement savings plan or plans and details of that plan(s)
- Other benefits offered, the cost of those benefits as well as any employer contribution (e.g. flexible spending accounts for healthcare or dependent care)
Once you’ve figured out the short-term impact of a potential job change, take a look at the potential long-term impact.
Although retirement benefits aren’t what they once were, they still compare favorably with the private sector. Between FERS and the potential maximum match on the TSP, the government is contributing somewhere in the neighborhood of 15% of your salary toward retirement. If you’re looking for a similar level of contribution, universities and school systems might come close, but private sector contributions are generally lower.
As to whether overall private sector compensation is lower, various studies come up with differing answers and a recent CBO study showed the disparity differed based on educational attainment.
Beyond the amount of the government’s contribution, there is also the nature of the retirement benefit to consider. The TSP is fairly similar to 401k and 403b plans that are common at large employers.
However, the FERS annuity is a pension, and a key benefit of a pension is that – regardless of what the stock and bond markets do – your benefit is fixed. Pensions shift the risk of investment performance from employee to employer, and the government also takes on some of the risk of inflation as well given the FERS’ cost-of-living adjustment. Two of the key risks we test for in a long-term plan are inflation and the risk of poor investment performance, so shifting some of those risks to your employer can increase the likelihood you’ll meet your retirement goal.
One of the decisions you’ll need to make if you’re planning on leaving the Federal government for employment elsewhere is what to do with your FERS contributions.
If you’ve been with the government more than 5 years, you’re eligible for a deferred annuity at retirement. You could request a refund of your contributions, but given the advantages of a pension, consider that option carefully. Make sure you understand what income you would earn from a pension and compare that to the income you could reasonably expect from investing the refunded lump sum.
TSP – Roll It or Leave It?
You’ll also need to make a decision about what to do with your investment in the TSP.
You could leave the funds in the TSP, although you’ll no longer be able to make contributions and you won’t be able to take out a loan. While the TSP just has a handful of investment options, they are broad-based, low-cost options that serve investors well.
If you’d prefer to roll the funds out of the TSP to an IRA or employer retirement account, make sure to keep an eye on fund or plan expenses and pay off any outstanding loan you have before completing the rollover.
There are a number of factors to consider in deciding to change jobs, and the financial impact is typically at the top of the list. If you’re considering leaving the Federal government, following the steps above can help you assess the financial impact of that change.
Micah Porter is President and CEO of Minerva Planning Group, a CFA charterholder, and a CERTIFIED FINANCIAL PLANNER™ practitioner. He began work at Minerva in 2003 with extensive experience in business planning and corporate finance.