If you are a government employee, retirement planning and mainstream advice about 401(k) plans and Social Security benefits probably won't apply to you. However, there are many ways government employees can plan for a successful retirement. The first step is understanding your benefits, and how to best apply them to your overall financial picture. Below is a look at the top strategies for government employees to plan for a successful retirement.
- Mainstream advice about retirement plans and benefits typically don’t apply to government employees.
- The Federal Employees Retirement System (FERS) provides Social Security benefits, a pension, and a thrift savings plan (TSP) to federal government workers.
- Benefits for federal employees are confusing so it may be a good idea to seek help from a financial advisor who specializes in this area.
- State, county, or municipal government employees may be entitled to a pension.
Federal Government Employee Retirement Benefits
Federal government employees are covered by different retirement systems depending on when they were hired.
If You Were Hired Before January 1, 1984
If you’re an older civilian service employee of the federal government who was hired on or before December 31, 1983, you may have been grandfathered into the Civil Service Retirement System (CSRS), which provides retirement, disability, and survivor benefits. Because you haven’t had Social Security taxes deducted from your paycheck, you won’t be eligible to receive Social Security benefits unless you’ve earned them through another job or qualify through your spouse.
If you do qualify for Social Security, your CSRS pension may reduce your benefits.
If You Were Hired in 1984 or Later
If you’re a civilian service employee who was hired in 1984 or later, you’re covered by the Federal Employees Retirement System (FERS). It provides Social Security benefits, a basic benefit plan (pension), and a thrift savings plan (TSP) that consists of automatic government contributions, voluntary employee contributions, and matching government contributions. The retirement benefits you’ll receive from these plans are structured as annuities based on your age, years of service, and plan contributions.
Thrift Savings Plan Contributions and Investments
The TSP is a defined-contribution plan, meaning that you decide how much to put in and how to invest the money. How much you end up within retirement is based on those decisions.
How Contributions Work
Employee contributions to a TSP can be pretax or after tax. If you contribute pretax dollars, you don’t pay any taxes until you start withdrawing money from your TSP. If you contribute post-tax dollars, you don’t have to pay taxes when you withdraw the money in retirement. Either way, your contributions grow tax-deferred.
The most you can contribute to the TSP for 2020 and 2021 is $19,500, plus an additional $6,500 in catch-up contributions if you are 50 or older.
Both CSRS and FERS employees can contribute to a TSP. However, only FERS employees receive employer contributions. If you’re covered by the FERS, your employer will automatically kick in an additional 1% of your salary, and if you make employee contributions, you are eligible to receive a matching contribution from your employer, too.
You should contribute enough to maximize your employer match and make sure you accrue enough years of service for the automatic 1% match to vest. You may also want to roll over any funds from a retirement account you had with a previous employer into your TSP.
TSPs offer a handful of investment choices for different risk appetites, from low-risk funds that invest in U.S. Treasuries bonds to higher-risk funds that invest in international stocks. You can even choose a life-cycle fund that is composed of a set of investments that changes as you get older and is designed to help you meet your retirement goals with little effort.
One of the best reasons to take advantage of a thrift savings plan is that the plan’s investment funds have extraordinarily low expense ratios. In 2019 (the most recent figures available), TSP participants paid just 42 cents in expenses for every $1,000 invested.
Outside of the TSP, even the industry leaders in low expense ratios charge significantly more. Vanguard, for example, is known for its low-cost index funds. The average expense ratio for Vanguard's funds is currently 0.10%, meaning investors pay $1 per $1,000 invested. Low expenses are a key factor in achieving high long-term investment returns, and seemingly small differences in expenses add up as your nest egg grows and the years go by.
“The investment options associated with the thrift savings plan are well-known for being low-cost and very well diversified. This savings in terms of cost, compounded over someone’s entire career, is tremendous. Just like the principle of compound interest is powerful in terms of returns, it is equally important when it comes to cost. The less you pay, the more you receive,” says Mark Hebner, founder and president of Irvine, CA-based Index Fund Advisors, Inc.
Specialized Professional Help
One of the biggest problems federal government employees face is that their benefits are confusing, and it is difficult to find a competent financial advisor who understands these benefits, says Richard E. Reyes, a certified financial planner with the Wealth and Business Planning Group, LLC, a registered investment advisor in Maitland, Fla. “Employees have to make an active effort to find good counsel and advice, and often they just depend on other employees who are just as clueless in this matter,” he says.
One professional qualification to look for in a financial adviser is the Chartered Federal Employee Benefits Consultant (ChFEBC) designation. Advisors who have earned this designation have studied and passed an exam on all federal employee benefits, including CSRS and FERS annuities (pensions), TSPs, life insurance, health insurance, and Social Security.
If you find a potential financial advisor with this qualification, the next step is to make sure they are a fiduciary, meaning that they are required to put your best interests ahead of their own—not everyone with the ChFEBC designation is. Some advisors without the designation may also be qualified to help you, but you should research them even more carefully.
State and Local Government Employee Pensions
If you work for a state, county, or municipal government, you may be entitled to a pension. Pensions are typically based on years of service, final salary or the average of your highest years of earnings, and a multiplier.
Each state has a different system, and even within that system, there are variations. Your line of work and the year when you were hired will typically affect your retirement plan. The key is to learn how the system works as soon as possible after being hired so you can plan accordingly. If your employer offers a 457(b) plan, you should strongly consider contributing so you'll have more than one income source in retirement.
The Bottom Line
Understanding how your retirement plan works, contributing to a TSP (if you can), and seeking professional advice are just a few of the strategies government employees should consider when planning for a successful retirement.
If you’re married, research how your spouse’s retirement benefits, if they have them, will interact with your benefits and affect your joint retirement plan. It’s never too early to start educating yourself about the complexities of a government employee’s retirement benefits and planning to make the most of them.