Uncertain Times

This week, the Office of Personnel Management announced that 43,649 full-time permanent federal employees retired in fiscal 2009 -- 27 percent less than projected. The number of retirees hasn't been that low since 2002.

Clearly, the uncertain economic times have many federal employees rethinking their options. Witness this recent comment on one of my columns:

I am a Federal Employees Retirement System employee who will have 27 years, 4 months and 23 days of government service on my 60th birthday (Dec. 30, 2012). I know I am eligible for a FERS retirement supplement at 60, but wouldn't I be better off to wait until I'm 62 in 2014 to retire and then apply for Social Security? FERS is so hard to calculate these days with the TSP so volatile. I don't know how to plan for my retirement.

If you retire when you are first eligible for an unreduced FERS retirement at 60, you'll receive your FERS basic retirement benefit, plus a supplement that is intended to bridge the time between your retirement and qualifying for Social Security at 62 (subject to an annual earnings limit). The supplement is computed based only on your years of civilian service under FERS.

If this person waits until 62 to retire, he or she will get the following additional benefits:

• An extra 10 percent in the FERS basic benefit computation, based on the fact that the employee is at 62 with more than 20 years of service.
• The Social Security benefit received instead of the FERS supplement will reflect a lifetime of Social Security-covered work rather than just the employee's FERS civilian federal service. So the Social Security benefit should be larger than the supplement.
• The employee will have two more years of service used to compute the retirement benefit and his or her high-three average salary likely will increase.

If you're in a similar position to this reader, it might pay to be even more thorough in your analysis. You could compare working until your full Social Security retirement age of 65 to 67, depending on your year of birth. That way, you'd be eligible for a full Social Security benefit instead of the reduced benefit payable at 62.

How you ultimately answer the question of when to retire will depend on whether the benefits you are entitled to will be enough to maintain the lifestyle you wish to have. That can be determined only by looking at all sources of retirement income and comparing them with all your anticipated expenses in retirement. If you come up short, then you might have to work longer.

As far as the volatility of the TSP, that depends on how diversified your account is. If you are invested 100 percent in the government securities G Fund, there is virtually no volatility. If you are invested 100 percent in the international I Fund, you have guaranteed volatility.

If you're planning to retire in a few years and begin using your TSP funds, it makes sense to keep most of your account balance in the G Fund. Just look at the how the TSP's life-cycle funds are diversified. For those who plan to retire in the near future, 74 percent of funds are allocated to the G Fund.

If you want to take advantage of more opportunity for potential stock market growth, then you can be a little more aggressive. Even if you're planning to leave in the next few years, you could introduce a little more risk into your portfolio by investing in the L2020 life-cycle fund. Here is its current investment allocation:

G Fund: 35%
F Fund: 7.5%
C Fund: 30%
S Fund: 10%
I Fund: 17%

For those under FERS, plotting your future retirement can be a challenge, especially when it's not clear where the economy is headed. But it's worth investing the time to consider your full range of options.

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.