6 Myths About Federal Retirement Benefits
Dispelling legends and misconceptions.
In everyday life, rumors, legends and misconceptions abound. For example, were George Washington’s false teeth actually made of wood? Nope.
“While Washington certainly suffered from dental problems and wore multiple sets of dentures composed of a variety of materials—including ivory, gold, and lead—wood was never used in Washington's dentures nor was it commonly employed by dentists in his era,” writes William M. Etter, a professor at Irvine Valley College.
I think one of the most important contributions I make in helping federal employees plan for retirement is to dispel rumors and myths. Here are some of the most common retirement-related myths I’ve come across in my conversations with federal employees.
Myth 1: Social Security will not be there when I retire.
About 62 million people, or more than one in every six U.S. residents, collect Social Security benefits. Almost all workers participate in Social Security by making payroll tax contributions, and almost all elderly Americans receive Social Security benefits. According to a recent Social Security trustees report, “Lawmakers have a broad continuum of policy options that would close or reduce the long-term financing shortfall” in Social Security. Of course, legislators have to choose from among these options and actually implement new policies—and the sooner they do so, the better.
Myth 2: The G Fund is the best place to keep my Thrift Savings Plan account safe.
The G Fund may never have a negative return, but the key to financial freedom in retirement is understanding how to invest and manage your retirement savings for maximum benefit. To learn more about retirement investing, you can start with the TSP website. There you can learn about the C, G, F, S, and I funds, as well as how you can diversify your TSP balance and future contributions based on how far you are from your need to use these funds in your retirement years.
The more you learn, the less you’ll fear managing your TSP. Or you can use one of the TSP’s Lifecycle fund options for investing, and minimize the need to actively manage your investments.
Myth 3: The best day to retire for everyone is the last day of the leave year.
This myth has arisen from the many articles that have been published about picking a retirement date—including some that I’ve written. In my most recent Best Dates to Retire column, I tried to explain that the reason to consider retiring at the end of the year—or more specifically, the end of the leave year—is to maximize the payout of your unused annual leave balance. Many employees carry over a balance of 240 hours of unused annual leave every year. In their last year of employment, they’re willing to save up a full year of leave accruals to boost their total hours of unused annual leave to 440 hours or more by the end of leave period 25 or 26. It’s like designing your own buyout.
But if you’re not among the people who save up that much leave, then there are good dates to retire throughout the year based on tax planning, a move to a new state, the weather, your retirement eligibility and many other considerations.
Myth 4: If you maintain Federal Employee Health Benefits coverage in retirement, you should not enroll in Medicare Part B.
This statement is debated frequently at retirement luncheons and pre-retirement seminars as well as in the comments section of this column. There are two reasons why federal retirees consider using their FEHB coverage with only Medicare Part A (hospital insurance) when they reach age 65. The first is that your FEHB plan will continue to cover you even if you don’t enroll in Part B (covering doctors’ services and outpatient care) at age 65. (You aren’t required to enroll in Part A to have FEHB coverage, but you will be automatically enrolled in Part A if you file for Social Security retirement, and there’s no cost for it if you’ve paid the Medicare tax during your career or the career of your spouse).
The second reason some retirees decide not to enroll in Medicare Part B is because they don’t want to pay the premiums. The monthly Part B premium in 2019 will range from $135.50 to $460.50 per person. That’s in addition to paying premiums for your FEHB plan. But the benefits of dual coverage can minimize your out-of-pocket health care costs over the rest of your life. And there are ways to manage the cost of the additional premium. I’ve covered reasons to consider Part B coverage in several columns over the years.
Myth 5: If you’re federal employee old enough to retire with at least 30 years of service, you can afford to retire.
Many employees are under the impression that once they’re eligible to retire from federal service (at age 55 with 30 years under the Civil Service Retirement System or at the Federal Employees Retirement System minimum retirement age with 30 years of service), they can stop working and live happily ever after. But that fairy tale ending isn’t always a reality.
For many employees, retirement after 30 years will provide a little more than 50 percent replacement of their gross federal salary, but not enough to replace their net income—let alone be able to retire comfortably. In order to retire with a sense of financial security, you may need to have not only a government pension, but retirement savings, eligibility for Social Security benefits, and health and life insurance coverage.
Financial freedom in retirement also requires not having excessive debt, and many retirees need to make lifestyle changes in retirement to be able to make ends meet.
Myth 6: CSRS is better than FERS.
I think that after more than 30 years of FERS being in existence, this belief is finally being laid to rest. There’s no question that some aspects of CSRS are more generous than FERS. The basic CSRS retirement benefit was designed to stand alone without the additional benefit of Social Security or personal retirement savings. CSRS retirees also receive immediate and full cost of living adjustments throughout their life after retirement. FERS retirees generally don’t receive a COLA until they reach age 62 and then it can be a “diet” COLA.
On the other hand, FERS offers flexibility that allows federal employees to retire and maintain lifetime health insurance with as little as 10 years of service if they are at the FERS minimum retirement age. FERS employees who contribute at least 5 percent of their salary to the TSP will receive a deferred 5 percent pay raise because of agency automatic and matching contributions. FERS employees who have spent a portion of their career covered by Social Security can maximize their Social Security retirement benefit and avoid the effects of the Windfall Elimination Provision or the Government Pension Offset that can adversely impact CSRS retirees.
The important thing to remember, whether you’re under CSRS or FERS, is that your retirement can be financially secure if you take control of the planning. This requires educating yourself on your benefits and how they can help you maintain a stable retirement income.