Milestones on the Path to Financial Security in Retirement
If you work in government, there are several moments in your life when you’ll face key decisions about your eventual retirement.
There are lots of milestones in life: Getting a driver's license, voting for the first time, buying your first beer (legally), getting married, moving to a new home and, of course, retirement. Along the way, if you work in the federal government, there are milestone moments that are important in the retirement planning process. Let’s look at some of them.
Retirement Eligibility and the Five-Year Rule
Do you know how old you must be and how much service you need to become eligible to retire from your federal career? Some employees will reach their minimum retirement age before they have enough service to retire. Others—especially those who joined the civil service right out of college—will have the service time needed before they’re old enough to claim their their immediate retirement benefit. You can learn more about retirement eligibility at the Office of Personnel Management’s website.
Remember that to continue your health and life insurance benefits in retirement, you must be enrolled for the five years immediately preceding your retirement. Consider enrolling five years before you’re eligible for retirement if you are not already covered to be sure you will have these valuable benefits along with your government pension.
Every Five Years
The rates for Options A, B, and C of Federal Employees Group Life Insurance increase every five years. Take time to reevaluate your need for life insurance compared with the cost of continuing coverage. Read the FEGLI Program Booklet for Federal Employees (or postal employees) and review the FEGLI Handbook. The FEGLI Calculator can help you figure out your coverage and premiums. Contact your human resources office if you have additional questions. You can cancel some of your FEGLI coverage at any time if it becomes more expensive than what it’s worth to you.
You can purchase long-term care insurance at almost any age, as long as you can pass the medical underwriting. But the younger you are at the time of purchase, the easier it will be to pass the health portion of the application and the less expensive your premiums will be.
This is the age when you can begin making catch-up contributions to your Thrift Savings Plan account above the annual elective deferral limit. The combined total of traditional and Roth contributions cannot exceed $19,500 in 2021. However, beginning in the year you turn 50 you can contribute as much as $6,500 above this amount each year. These amounts may change in future years.
If you separate from federal service in the year you reach age 55 (or later), you can take penalty-free distributions from your TSP account. If you separate from federal service before 55, you might have to pay an early withdrawal penalty tax equal to 10% of any taxable portion of the distribution not transferred or rolled over that is withdrawn prior to age 59½. The TSP has a fact sheet, Important Tax Information About Payments from Your TSP Account, which explains this and much more about taxes and the TSP.
Age 59 ½
Once you reach age 59½, withdrawals from employer-sponsored retirement plans (if you separated before age 55 and didn’t meet an exception) and IRAs are no longer subject to the 10% early withdrawal tax. You still might owe regular income tax on the distributions.
This is your first eligibility for Social Security retirement benefits. Keep in mind that you can delay Social Security until as late as age 70 to earn a larger benefit. Even if you are no longer working, the benefit payable at age 62 is permanently reduced by 30 percent (for those born before 1960, the reduction is less). If you wait to claim Social Security beyond your full retirement age (age 67 for those born in 1960 or later), you’ll get an increase in your benefit for every year you delayed.
Under FERS, if you retire at age 62 or later and have at least 20 years of creditable service, your retirement benefit will be computed using a 1.1 percent multiplier rather than 1.0 percent. This results in a permanent 10 percent increase in your FERS benefit.
Your initial enrollment period for Medicare starts three months before your 65th birthday and ends three months after. If you are employed and covered by health insurance through your employment or if you are covered by your spouse’s health benefits and they are still employed, you can delay Medicare enrollment past age 65 without a late enrollment penalty. There is a special enrollment period that follows your retirement for eight months.
Individuals must begin taking required minimum distributions from traditional and Roth TSP accounts starting at age 72. You can defer your first RMD until April 1 of the year after you turn 72, but then you're required to take two distributions in that year. If you don’t withdraw enough to meet the requirement during your first distribution calendar year, the TSP is required to disburse your first RMD to you by April 1 of the following year.
Are you nearing one of these milestones? If so, take the time to learn more about your benefits and take action if necessary to be sure you’re getting the full value of your federal retirement benefits before and after retirement.
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