If you play your cards right, you can walk out of government with the same net income as when you retired.
One of the things I love about my job of helping federal employees understand their retirement benefits is that I mostly provide good news—and when the news isn’t great, there’s generally a reasonable solution to make it better. Most federal employees I talk to end up pleasantly surprised about their potential retirement income.
There are times when an employee may be eligible to retire, but due to a variety of factors, such as entering federal service later in life, may have to work a little longer than they would like. But in most of these cases, the employee is grateful to know they can work long enough to earn a defined benefit (pension) with as little as five years of civilian federal service, and can be fully vested in their Thrift Savings Plan account after only three years of service.
I love when an employee finds out the value of retiring under the Federal Employees Retirement System after viewing it as the sum of three parts: the FERS basic benefit, Social Security and the Thrift Savings Plan. I meet federal employees on a regular basis who are going to receive the same net income when they wake up the day after they retire as they did when they were going to work every day—and that includes those who retire under the Civil Service Retirement System, too.
Net income—that is, income after withholdings—is important because it’s the thing you’re trying to replace, rather than gross income. While employed, you’re making contributions from your biweekly gross pay to FERS or CSRS and the TSP. You’re also paying Social Security and Medicare wage taxes. These withholdings will not come out of your retirement income. Although your retirement benefits are subject to federal (and in some cases, state) income tax, you may not have to pay as much as you did while employed.
Other typical withholdings from federal retirement income are for insurance, including health, life, long-term care and dental and vision. Some employees also need to consider potential reductions to their FERS or CSRS retirement benefits for survivor benefit elections, former spouse benefits awarded in a divorce decree, and other factors.
I especially enjoy teaching mid-career employees the secrets to a successful retirement and seeing the look of understanding on their faces as they gain valuable knowledge about their federal benefits. Some of those secrets have to do with consistently increasing the amount of savings in your TSP account throughout your career and always striving to save a minimum of 5 percent of your basic pay. It is also important for employees of any age to be sure all of their federal civilian and military service is properly documented and be aware of any unpaid service credit deposits.
Most important of all is to look at more than a generous salary offer when deciding whether to continue serving until retirement in government, or leave to pursue a career in the private sector. Federal employees come out ahead in many cases when compared to employees who retire from jobs in the private sector.
According to the Employee Benefits Research Institute, retirement plans in private companies have changed dramatically. The total assets in private sector defined contribution plans—such as 401(k) plans—are substantially larger than the assets in defined benefit plans (pensions). This was not the case in 1985. Furthermore, the percentage of retirement plan participants who consider a defined benefit to be their primary plan has dropped significantly. In contrast, public sector retirement plan participants who consider a defined benefit plan as their primary plan has held steady, if not increased.
And don’t overlook health insurance. As of 2009, 86 percent of public-sector workers received employment-based health insurance coverage, compared to 68 percent of private-sector workers. Participants in the Federal Employees Health Benefits Program can carry insurance into retirement as long as they meet the five-year test.
Be sensitive when talking to friends and family who have spent their careers in the private sector. When the subject of retirement benefits comes up, you may well find you will be getting the best replacement of pre-retirement income at the earliest age. It might be best to treat the subject like religion and politics, and just avoid it.
Photo: Flickr user Jennicatpink