What are the Biggest Financial Considerations When Retiring from a Federal Career?
When do you know you have enough to retire? And are you ready?
Determining your readiness for retirement is a pivotal stage in your financial journey, necessitating careful planning and assessment. It encompasses not only the financial aspect of ensuring sufficient retirement savings and income for your preferred lifestyle but also extends to non-financial factors such as health and mental preparedness.
This article will delve into the primary considerations for retiring from a federal career. Due to the expansive nature of this topic, we will provide a concise overview for brevity. We will cover the most important items to consider which include:
- Eligibility for immediate retirement
- Survivor benefits for spouse and family
- Gross income vs net income
- Eligibility for FEHB or TRICARE
- Medicare
- Eligibility for Special Retirement Supplement (SRS)
- Social Security
- Income strategy for TSP and other investments
- Mental readiness for the shift to retired life
- Health
How Much Do You Really Need to Save for Retirement?
Income replacement rates refer to the percentage of your pre-retirement income that you need to generate during retirement to maintain a similar lifestyle. This rate typically ranges between 70-90%, depending on your retirement lifestyle goals and obligations. Factoring in income sources like CSRS/FERS pension, Social Security benefits, retirement account withdrawals, and other income can help in achieving your desired income replacement rate.
We have found most people do not see a difference in their financial lifestyle when achieving an 80% income replacement rate. There are several items you will no longer pay in retirement such as FICA which is 7.65%, TSP and retirement savings, and HSA/FSA contributions.
Adjust Your Financial Plan for Inflation and Cost of Living Increases
Inflation and the cost of living increases are pivotal factors that need to be considered when planning your retirement savings. Over time, inflation erodes the purchasing power of money, meaning that you will need more funds in the future to maintain the same standard of living. Make sure to adjust your cash projections for inflation in your financial plan. Fortunately, CSRS/FERS pensions and Social Security adjust for inflation so that is not as much of a concern.
*Note, the FERS COLA does not adjust for a perfect 1-1 with CPI
What is the Ideal Age to Retire from Federal Service?
Determining the right age to retire is a personal decision, influenced by various factors unique to each individual. While the typical retirement age in the private sector hovers around 65, federal employees often retire earlier, with an average age of 62. Federal workers enjoy more flexibility regarding early retirement, with eligibility for immediate retirement starting as early as 50 for Law Enforcement Officers (LEOs), 55 for Civil Service Retirement System (CSRS) participants, and 57 for Federal Employees Retirement System (FERS) employees.
However, selecting the optimal retirement age extends beyond federal eligibility criteria. It necessitates a consideration of personal aspirations, lifestyle preferences, and external financial circumstances. While retiring early may offer additional leisure time and potentially more years of enjoyment, it demands a more substantial retirement fund and meticulous financial planning to ensure sustained financial stability throughout retirement.
Several factors help decide the best time to leave federal service. These include:
- Eligibility to receive an immediate retirement vs deferred or postponed retirement
- Special Retirement Supplement (SRS)
- Working after leaving federal service
The impact of a late retirement on savings and income can have a dual impact on your financial health. On one hand, it allows more time to contribute to your retirement savings, increasing your retirement account balances, and possibly your investment earnings. On the other hand, it might mean a shorter period to enjoy retirement. However, delaying retirement can significantly enhance your social security benefits and ensure a higher income when you decide to retire. This approach could be particularly beneficial for those who need to catch up on their retirement savings.
Eligibility for Immediate Retirement
Are you eligible for an immediate annuity, or are you considering a deferred or postponed annuity? It’s important to understand the implications of each option. With a deferred retirement, you won’t have access to Special Retirement Supplement (SRS), Federal Employees Health Benefits (FEHB), or Federal Employees’ Group Life Insurance (FEGLI), which can be a significant loss. Opting for a postponed retirement will allow you to keep FEHB and FEGLI once your pension begins. In the interim, there will be no SRS, FEHB, or FEGLI so you will need to plan for an alternative health option temporarily.
If you qualify for an immediate annuity, weigh the pros and cons of leaving or continuing work after federal service. Continuing to work can increase your pension amount for life and provide bonuses, such as a 10% boost at age 62 and 20 years of service. On the other hand, retiring earlier allows you to receive both pension payments and a second source of income, providing flexibility in your financial planning.
Eligiblity for Special Retirement Supplement (SRS)
The SRS serves to bridge the income gap that arises when retiring before reaching age 62. This supplemental income offers an extra financial cushion until eligibility for Social Security benefits begins at age 62. However, what if your plan entails claiming Social Security benefits at your Full Retirement Age (FRA) of 67? With the end of SRS at 62, there could be a significant reduction in income. In this scenario, options include exploring part-time work to supplement income, adjusting to a reduced budget, or implementing an income strategy derived from investments to tide over the waiting period.
Be mindful of the earnings test if planning to work while receiving a Special Retirement Supplement. You do not want to include SRS income in your financial plan if you will be ineligible because of earned income.
Survivor Benefits for Spouse & Family
For married individuals, it’s crucial to carefully assess whether opting for a survivor benefit is necessary to provide ongoing support for your spouse in the event of your passing. Consider whether your family would remain financially secure if your pension were to suddenly vanish or undergo a substantial reduction, such as by 50% or 75%. Running the numbers for different scenarios where one spouse outlives the other can help gauge comfort levels with projected cash flow. However, it’s important to note that there’s a cost associated with selecting a survivor benefit, which diminishes the overall pension amount. For effective retirement budgeting, this reduced pension amount must be factored into income estimates.
50% survivor benefit costs 10% of the pension.
25% survivor benefit costs 5% of the pension.
Gross Income vs Net Income
In preparing for retirement, it’s essential to assess both gross and net income figures. Gross income numbers warrant attention to facilitate strategic tax planning, especially if you’re nearing higher tax brackets. Anticipate potential tax hikes in the future; currently, if tax rates remain unchanged, middle-class tax brackets are slated to rise by 3-4% in 2026.
Net income serves as the foundation for budget planning. After factoring in taxes and deductions, does your net cash flow align with the lifestyle you envision for retirement? Calculating net income involves subtracting various components from gross income figures, including:
- FEHB
- FEGLI
- Federal taxes
- State taxes if applicable
Eligibility for FEHB & TRICARE
Determine your eligibility for Federal Employees Health Benefits (FEHB) or TRICARE. Check whether you meet the 5-year rule for FEHB eligibility. If not eligible for either, you will need to explore private insurance or Medicare options and assess their suitability for your health needs and financial situation. Consider whether delaying retirement to become eligible for FEHB is a viable option. FEHB offers significant benefits, with the government covering 72-75% of the premium, making it a valuable entitlement for federal retirees.
If you’re relying on TRICARE, ensure you’ve budgeted for Medicare Part B costs for both you and your spouse during retirement. Planning ahead for healthcare expenses is essential for a secure retirement.
The Medicare Decision
If you’ve retired before reaching age 65, you’ll need to decide whether to enroll in Medicare Part B. For those retiring after turning 65, there’s a brief window post-retirement to make this decision. However, it’s crucial to note that opting for Medicare Part B incurs additional costs that can significantly impact your budget. These expenses must be carefully weighed and factored into your financial planning for retirement.
Social Security
Determining the timing of Social Security benefits is a crucial factor in setting your retirement date. Are you planning to commence Social Security upon retirement? If not yet eligible or if you intend to delay benefits for a few years, how does your retirement plan address the income gap during this period? It’s essential to consider these questions carefully when planning your retirement strategy.
The full retirement age (FRA), defined by Social Security Administration, is critical in determining your Social Security benefit amounts. Claiming Social Security before reaching your FRA results in reduced benefits, while delaying benefits past your FRA can significantly increase your monthly benefit. Understanding your FRA and how it impacts your Social Security retirement benefits is essential in planning when to retire and optimizing your income in retirement.
Typically, for those born in 1960 or later, the reduction is about 6.67% per year for the first three years before FRA and about 5% for each additional year. For each year that you delay claiming Social Security benefits after reaching Full Retirement Age (FRA), your benefit amount typically increases by 8% until you reach age 70. This increase is known as the Delayed Retirement Credit (DRC).
Income Strategy for TSP, Retirement Plans, and other Investments
Developing an investment strategy tailored to your specific financial goals is essential for safeguarding the longevity of your retirement savings. How do you plan to generate income from your investments? Establishing a clear income and withdrawal strategy is paramount. A widely recognized guideline suggests withdrawing approximately 4% of your total investments annually for income purposes. While some sources suggest higher withdrawal rates like 5% or 6%, it’s worth noting that a 4% withdrawal rate has been extensively studied and proven to be a prudent choice to prevent prematurely depleting your savings.
Consider whether withdrawing 4% of your total investments will supplement your pension and Social Security sufficiently. Ensuring your income streams are balanced and sustainable is key to maintaining financial stability throughout retirement.
Other Factors to Consider
Mentally Prepare for the Shift to Retired Life
What plans do you have for your time once retirement arrives? Research indicates that unpreparedness for retirement can lead to feelings of isolation, depression, or dissatisfaction with daily activities. It’s not uncommon for retirees to experience boredom within the initial years and even return to work that pays substantially less and more importantly is unfulfilling. Retirement marks one of life’s significant transitions, impacting your routine, social interactions, and sense of self.
Mental preparation for retirement is vital. Cultivating a new sense of purpose, exploring new interests, and nurturing existing or new social connections can help ease the adjustment period. It’s important to acknowledge that relationships may evolve during this phase.
Retirement may evoke a range of emotions, including excitement, uncertainty, and anxiety. Facing these emotions head-on is crucial, viewing them as natural responses to life’s changes. Building a support system, seeking professional guidance if needed, and prioritizing self-care are essential strategies for navigating this transition successfully.
Current and Future Health
How is your physical health faring? If you’ve noticed a decline in your health, especially if work is exacerbating the situation, it might be time to explore new opportunities. Initiating a financial plan can bolster your confidence in the decision to leave work earlier than anticipated, providing a smoother transition when the time comes.
It’s essential to broaden our understanding of health beyond mere absence of illness. The World Health Organization defines health as encompassing complete physical, mental, and social well-being. This holistic perspective acknowledges the influence of various factors such as spiritual, emotional, biological, genetic, behavioral, and societal elements on our overall health.
Get Ready for Retirement Bootcamp!
Personally, I’ve found retirement bootcamp is the best way to test retirement readiness. The goal is to simulate living on your expected net retirement income during the final 1-3 years before retirement. This approach offers a dual benefit: it allows you to adjust to potentially lower income levels and enables you to allocate surplus savings towards retirement savings or other financial objectives.
Living on your anticipated retirement income provides valuable insights into your financial preparedness. If you find the monthly budget uncomfortable or inadequate, it’s a clear signal to reassess your financial plan and take proactive steps to improve your retirement cash flow. This proactive approach ensures you’re better positioned to achieve financial security in retirement.
Reach Out to Us!
If you have additional federal benefit questions, contact our team of CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Federal Employee Benefits Consultants (ChFEBC℠). At PlanWell, we focus on retirement planning for federal employees. Learn more about our process designed for the career federal employee.
Preparing for federal retirement? Check out our scheduled federal retirement workshops. Sign up for our no-cost federal retirement webinars here! Make sure to plan ahead and reserve your seat for our FERS webinar, held every three weeks. Want to have PlanWell host a federal retirement seminar for your agency? Reach out, and we’ll collaborate with HR to arrange an on-site FERS seminar.
Want to fast-track your federal retirement plan? Skip the FERS webinar and start a one-on-one conversation with a ChFEBC today. You can schedule a one-on-one meeting here.
