September 14, 2007Earlier this year, I addressed the age-old question of whether you should retire from government as soon as you're eligible, or stick around for a while. This week, I thought I'd look at a variation of this question to dig a little deeper.
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:
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:
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:
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:
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:
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.
September 14, 2007