Suppose you know that you want to keep working even after you become eligible to retire. In that case, the question becomes, is it better to continue to work in government for a few more years to increase your federal retirement benefit, or to retire and take a job in the private sector while collecting your federal retirement? Let's explore this question by looking at a couple of case studies.
Let's assume David is going to retire from federal employment at his first opportunity and immediately return to work in the private sector using the valuable skills he's gained. And let's figure he's in the following situation:
- High-three average salary: $80,000
- Length of service: 30 years
- Age: 55
- Immediate Civil Service Retirement System benefit: $45,000 per year
- New salary in his second career: $85,000.
David will be able to continue his federal health insurance. He will have taxes and 401(k) contributions deducted from his new salary. He will contribute to Social Security, and his new employer will provide 6 percent matching on his 401(k) but no pension benefits.
To come out ahead after three years, here's what David might need to do:
- Live on his new salary, after contributing the maximum to his 401(k) -- $20,500 in 2007, including $5,000 in catch-up contributions. This shouldn't be difficult, since he essentially had the same salary in his federal career.
- After paying the taxes and his health insurance out of his civil service retirement benefit, put the rest of the CSRS check in a safe short-term investment.
- Use the invested CSRS benefits to pay off his mortgage and any other consumer debt after three years. This will lower his expenses when he eventually stops working.
- Use the new 401(k) savings as well as the additional Social Security benefit (assuming he will have at least 40 credits of coverage) to offset the additional CSRS benefits he would have earned if he had not retired so soon. The three years of Social Security wages added to his record should increase his benefit by about $1,000 per year (or more, depending on what other Social Security wages he's had during his lifetime), but he won't be eligible to receive this benefit until later. The additional savings in his 401(k) should be about $100,000 (assuming he will earn 10 percent return on his diversified 401(k) investment). This investment could provide about $5,000 per year in income while preserving the principal.
Let's assume Lorraine decides to stick it out in government. And after she eventually retires, she won't be looking for a second career that generates substantial income.
Here are Lorraine's numbers:
- High-three average salary: Currently: $80,000. In three years: $90,000.
- Length of service: Currently: 30 years. In three years: 33 years.
- Age: Currently: 55. In three years: 58.
- CSRS benefit in three years: $56,025
Lorraine's retirement benefit appears to be more than $11,000 per year higher than David's. But remember that while David is receiving his CSRS retirement, he also will get an annual cost of living adjustment. If that averages out to 3.5 percent per year, his retirement will go from $45,000 to almost $50,000 after three years, cutting the gap with Lorraine down to $6,000 a year.
To make up that difference, David is counting on the investment income he will have from his 401(k) and the boost in Social Security retirement for having three more years of high wages added to his record. If he saves $20,500 a year in his 401(k) for three years, gets a 6 percent match from his employer and earns a 10 percent return, he should be able to withdraw about $5,000 a year without affecting the principal in his investment. The additional Social Security benefits could add up to $1,000 to $2,000 a year.
That sounds like a wash financially as compared to Lorraine. But David may still be ahead, though, because he can save his retirement benefit while employed in his second career.
As you compare David and Lorraine's scenarios, here are some questions to think about:
- Would you be disciplined enough to live on your new salary and put the retirement income away?
- How much would you earn on your investments? A 10 percent return isn't always feasible.
- Depending on your situation, there are tax considerations that could further complicate the process.
- What kind of second career is available to you? How far would you have to commute? What hours would you work? What kind of vacation time would you get? What do you mean Columbus Day is not a paid holiday? A cubicle rather than my government office with a window and a door -- how dare you?
- How old will you be at retirement? Your age can affect the amount of your Social Security benefit.
- How long do you plan to work? There might be additional benefits available from a second career, such as a pension, if you stay long enough to become vested. Also, you might be maxed out with 41 years and 11 months of service under CSRS, so there would be less benefit to continuing your federal career.
- Are you due for a promotion? A jump in salary could make a big difference in your high-three.
The FERS Angle
What if David and Lorraine were under the Federal Employees Retirement System, rather than CSRS?
Under FERS, the pension benefit would increase by only 1 percent per year and there would be no inflation adjustment until after age 62 (with the exception of special groups, such as law enforcement officers and firefighters). If Lorraine and David were covered by FERS, they would be able to accumulate additional retirement savings (with matching contributions) as well as Social Security benefits whether they continued in their federal careers or chose a private sector job. The extra pension benefit they would gain by working longer for the federal government could be offset by the additional income they would earn in their second careers. But they would still have the benefit of maintaining their federal health insurance upon retirement. To-Do List
Here are the bottom-line questions: How happy are you with what you are doing now? How anxious are you to start something new? How disciplined are you to save and invest for the future? As you think about those questions, here are three things you can do to help make your decision about what's best for you:
- Request a retirement estimate from your agency's benefits office for two different dates. In many agencies, this request can be made online.
- Attend a job fair to see what kind of work is available for someone with your skills and experience.
- Attend a pre-retirement seminar to be sure you understand the basics of your federal retirement and to learn about opportunities for your life after retirement. Most agencies sponsor pre-retirement training that addresses your benefits, financial planning, tax issues and life after retirement.
Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.