Be Prepared

The weather forecasters say it's going to be a rough winter here in the East. Maybe it will and maybe it won't. That's the way it is with predictions. Still, just knowing of the possibility, it's prudent to prepare. You can't deal with snow until it's on the ground, but it helps to buy a shovel in advance.

Can you tell where I'm going with this? Here are some other recent predictions and possibilities:

• Federal retirement benefits in the future might be computed using employees' high-five average annual salary instead of a high-three. (This was the case in the past, so it certainly could happen in the future.)
• Federal salaries are subject to a pay freeze for two years -- or maybe three or more.
• Retirees might have to pay a higher share of their health insurance premiums.
• The stock market is going to rise; the stock market is going to fall; the stock market is going to fall and then rise again.
• Bond rates are headed down when interest rates start to increase.
• Congress is going to change Social Security, through means testing, raising the retirement age, or increasing the penalty for applying for early benefits.
• There will be no more automatic cost-of-living allowances for retirees.
• Employees' contributions toward their retirement are going to increase.

We don't know if any of these predictions will ever come true, or how they will affect the Civil Service Retirement System or the Federal Employees Retirement System -- and whether they might affect people retiring this year or only those born after 1950. If you've been watching as long as I have, you'll know that some of these predictions have been around literally for decades.

We might not know what the future will hold, but we do know that federal retirement systems (both CSRS and FERS) are a major benefit to employment in federal service and therefore serve as a recruiting tool to maintain a competitive federal workforce. The government must compete with private companies as well as state and local governments for qualified employees. One of the reasons Congress might hesitate to reduce federal retirement benefits is because such a move could affect the ability to maintain a vital federal workforce.

That doesn't mean there won't be changes that negatively affect retirement benefits due to the current economic situation. So the best thing to do is be prepared. The good news is whatever the future holds, you have some options. Let's focus on some of the positive aspects:

There's no mandatory retirement. (Except for special groups, such as law enforcement officers, firefighters and air traffic controllers.) Therefore, if something changes the computation of your retirement, you can offset that by working longer to increase the value of the benefit based on your length of service. Under FERS, there's no maximum retirement benefit. If you work 30 years, you will receive 30 percent of your high-three average salary (33 percent if you're 62 or older at retirement). If you work 35 years, the percentage increases to 35 percent (38.5 percent if you're 62 or older). Under CSRS, you can work long enough to replace 80 percent of your high-three average salary -- or more, with unused sick leave. The good news is it doesn't take as much as you might think to live comfortably in retirement, considering you will no longer be putting savings in the Thrift Savings Plan, contributing to CSRS or FERS, or paying Social Security taxes. If you are healthy and enjoy working, then you can continue to do so beyond when you become eligible for retirement. If you are concerned your retirement income at 55, 60, or even 65, won't be enough to afford a comfortable lifestyle, then consider staying in the workforce longer.

You can save more and spend less. Most federal employees are not maxing out their TSP savings opportunities. All federal employees can defer $16,500 of their taxable salary in 2011 to their TSP account. Employees who are age 50 and older can contribute an additional $5,500 tax-deferred. By having more money in your retirement savings, you could offset lower Social Security payments or retirement benefits if changes occur. For example, let's say there's a change to a high-five computation in retirement benefits. If you need $3,000 a year to make up for this loss, then you can receive that much income from a $75,000 investment that you withdraw from at a rate of 4 percent a year.

Leave has value. Annual leave is paid as a lump-sum payment when an employee separates from federal service. If you're concerned about how long it will take the Office of Personnel Management to process your retirement benefit, then try to conserve your annual leave during your last year of service. You'll have a larger lump-sum payment to tide you over. If you earn eight hours of leave per pay period, that adds up to 208 hours over 26 pay periods. If you carry over 240 hours of leave, you can cushion the first six weeks of retirement.

Your investments could hold the key to your security. Stock and bond markets will rise and fall. Dollar cost averaging and diversification will allow you to take advantage of these certainties. By investing in the TSP (or other investments), you will be buying when prices are low and selling when prices high at various times. By putting some of your investment in stocks and some of it in bonds and safer investments will allow you to reduce your risk. The TSP has more information about these principles. Laws don't change overnight. Take a deep breath and don't panic. You'll have plenty of time to react. Bills have to be introduced, go to committee, and then typically go through endless rounds of negotiation before they even get to the House or Senate floor. After that, the other body has to agree to the measure and the president has to sign it. And even then, changes won't take effect immediately and might not affect everyone. Many laws that change actually are improvements. If you retired under FERS before Oct. 2009, you would not have received any credit for your unused sick leave. Now you do. If you retire before the end of 2011, you'll miss out on the opportunity to save in the Roth option of the TSP that will be implemented in December. If you had retired before 1987, you would not have had the opportunity to save at all in the TSP. If you want to stay up to speed on potential changes, it's worth reading this analysis of seven of the recommendations by the National Commission on Fiscal Responsibility and Reform by John Grobe, a fellow seminar presenter and federal benefits specialist. 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.