April 16, 2010Someone asked me at one of my seminars if I could list the most important things employees should know as they plan for retirement. I found it difficult to boil all of the important information down to a short list. So I decided to focus on things you might regret if you didn't learn them early enough. Here they are: Think about retirement from the first day on the job. I don't mean dwelling on it every waking moment or setting a countdown clock on your computer. I mean simply setting a goal for your future. You can change it over time, but knowing generally where you want to be will be a great help in figuring out how to get there.
Do you know when you are eligible to retire? Do you understand what factors affect the value of your retirement benefits? Have you given any thought to what you might want to do later in life? From personal experience in this area, goal-setting is important. My husband spent the past 30 years in federal service, while I spent some time in government and more time self-employed in the consulting world. We've always had an eye on the future as we made decisions over the years. Having dreams and some concrete goals made it easier to understand the consequences of our decisions and deal with the unforeseen life events that can put a monkey wrench in the best-laid plans.
Take the Thrift Savings Plan seriously. If you're in the Federal Employees Retirement System, this is the key to your retirement security. This is especially true if you're a higher salaried employee, because you'll get a proportionately lower replacement of your income from Social Security benefits. I think all FERS employees should make 5 percent of salary their minimum contribution to the TSP, to take full advantage of agency matching contributions. Higher wage earners may need to put away a little more.
Have you taken the time to learn about the G, C, F, S, and I funds? Do you understand what it means to invest for the long-term? Are you increasing your contributions when you get a pay raise? Do you know when and why you should rebalance your account? Have you considered using the life-cycle funds if you are not sure how to properly invest your TSP savings? Do you understand all of the money in your TSP account belongs to you, even if you leave federal service before you retire? The automatic 1 percent agency contribution for FERS employees has a three-year vesting requirement, but other than that, all other contributions, matching contributions and earnings are immediately vested.
I've had employees tell me they're not investing in the TSP because they don't believe they are going to make federal service their lifelong career. So what? You still need to have a career's worth of retirement savings, no matter where you end up. If you stay in government, after a 30- to 40-year career, you'll get a FERS basic benefit and Social Security. Depending on your age, length of service and wages, these two benefits could replace 40 percent to 65 percent of your pre-retirement wages. You might need to replace another 10 percent to 30 percent of your income with the money you've invested in the TSP to have a financially comfortable retirement.
Take responsibility for your official personnel folder. The records maintained in your file document the years of service that will be the basis for establishing your retirement eligibility and computing your benefits. Have you kept personal records in the event your official record is lost, misplaced, shredded, flooded, burned or deleted?
Employees should maintain copies of personnel action statements showing retirement coverage, dates of service, tours of duty and salary rates. Some employees now have electronic personnel folders, but many personnel records are still maintained on paper. Do you have copies of your beneficiary designations, insurance enrollment forms and TSP forms? If you have a period of service not covered by Civil Service Retirement System or FERS retirement contributions, do you know you might be able to pay a deposit to get credit for this service? (This can get complicated -- you might need to enlist the help of a retirement specialist from your HR office to explain the details.)
If you had a break in service or took a refund of your retirement contributions, are you aware of how this could affect your retirement benefits? If you have been on active duty in the military, do you understand how this service will be credited toward your civil service retirement? These are important questions for employees throughout their careers. If you don't think about them until you're three months from retirement, you might find yourself needing to come up with a large payment that includes 30 years of accumulated interest.
Think about what you don't want to think about. Do you know what would happen if you died or became disabled before retirement? No one really likes to think about this possibility, but it happens, and advance planning can make it a lot easier to deal with. Do you have a spouse and/or dependent children? Would they have adequate income to continue their life in the same home with the same plans for college and a bright future if your income suddenly stopped? Do you have enough life insurance coverage? Too much? Have you compared the price of Federal Employees Group Life Insurance to a private term life insurance policy?
Have you thought about the potential need for long-term custodial care in the event of a disabling condition? Do you understand the spousal and dependent children's benefits available if an employee dies in service? Have you kept your beneficiary designations up to date? Have you done any basic estate planning? Do you have a will or a personal trust? Do you have a living will and a durable power of attorney? In the event of a terminal illness, did you know FEGLI has a living benefit; CSRS and FERS offer an alternative form of annuity and the TSP allows for financial hardship withdrawals? There are lots of questions to ponder in this area.
Pass the five-year test. When you're within five years of your retirement, be sure you have coverage under FEGLI and the Federal Employees Health Benefits Program. Retirees are eligible to maintain their life and health insurance benefits in retirement as long as they pass this five-year test. The Office of Personnel Management has the complete rules for FEHBP and FEGLI.
This list might only include five items, but to truly understand all of them requires gathering information and experience. So keep reading the column every week to further expand your knowledge.
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.
For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.
April 16, 2010