Federal employees have access to unique retirement benefits.  Understanding how to maximize these valuable perks is essential to securing a financially stable, stress-free retirement.

In this article, we’ll take a look at just a few of the strategies informed federal employees are using to take control of their financial futures.

by Brian Swerdlow

What you should remember:

  • Conventional retirement advice often doesn’t fully apply to federal employees due to their distinct benefits.  For this reason, it pays to find a financial professional who specializes in helping government employees maximize their benefits.
  • The Federal Employees Retirement System (FERS) provides three pillars: Social Security, a pension, and a Thrift Savings Plan (TSP).
  • FERS calculates your pension based on the average of your highest three consecutive years of salary.
  • Retirement planning for federal employees can be complicated. Don’t rush through the decision-making process, and always seek qualified advice.
  • State and local government employees may also have pension options that can help them or possibly hurt them in retirement.

 

Federal Retirement Systems: CSRS vs. FERS

Your retirement system will be either the Civil Service Retirement System (CSRS)or the Federal Employees Retirement System (FERS), depending on your hire date.

Those hired before January 1, 1984, fall under CSRS.

An older employee, like Joseph, hired in the early 1980s, may still be covered under CSRS. CSRS provides retirement, disability, and survivor benefits. However, Joseph doesn’t have Social Security contributions from his federal service.  This means he must qualify for Social Security benefits through other work or via his spouse. Even then, his CSRS pension could reduce his Social Security benefits.  Joseph needs to crunch the numbers and plan to ensure he has enough money to last a lifetime.  

Government employees hired after 1984 have FERS.

FERS covers government employees hired after 1984, like Sarah. It has three distinct components: Social Security, a pension, and the Thrift Savings Plan (TSP). Sarah’s retirement plan consists of Social Security benefits, an annuity from her FERS pension, and investments she made into the TSP. By contributing to all three, she’s done a lot to ensure a well-rounded retirement.

Your Thrift Savings Plan (TSP) is the cornerstone of your retirement plan.

The TSP is an integral part of retirement planning for most federal employees. If you don’t make your TSP contributions consistently, you could run out of money in retirement. For example, Moises, a GS-12 in his early 40s, wasn’t contributing the 5% of his salary needed to receive the maximum agency match. After a financial review, he increased his contributions by 1%, which earned him an additional $500 per year from his employer. Increasing his contribution to trigger the agency match helped Moises stay on track for retirement.

Why increasing TSP contributions can make a significant impact.

Let’s look at Linda, a GS-9 employee located in the “rest of the U.S.” pay area. Linda’s salary increased from $62,024 in 2023 to $64,732 in 2024. By putting only an additional 1% of her salary into her TSP, she’s adding an extra $647 per year. If she hadn’t been contributing the full 5%, this move would also trigger additional matching funds from her employer. Even accounting for inflation, Linda’s small sacrifice now could make a huge difference in her retirement later on.

Maximizing Your TSP Contributions

One of the best strategies is contributing enough to secure the full agency match. Both CSRS and FERS employees can contribute to the TSP, but only FERS employees like Sarah are eligible for the employer match. By contributing at least 5% of her salary, Sarah ensures she’s receiving every dollar her agency is willing to contribute.

The IRC § 402(g) elective deferral limit for 2024 is $23,000. This limit applies to traditional (tax-deferred) and Roth contributions you make during the calendar year.  If you are over 50, you can make catch-up contributions of an additional $7,500.  Your contributions can be pre-tax or post-tax, depending on your preference.  Both options grow tax-deferred until retirement.

TSP Investment Choices

The TSP offers various investment options, from low-risk U.S. Treasury bond funds to higher-risk international stock funds.  Tom, nearing retirement, prefers a lifecycle fund that adjusts investments as he ages. A lifecyle fund allows him to focus on his career, knowing his TSP automatically adjusts to meet his future retirement goals.

Low Costs of TSP Funds

A notable advantage of the TSP is its low-cost investment options. For example, Dwayne, a savvy investor, noticed the TSP’s expense ratios are significantly lower than industry averages, paying less than 60 cents per $1,000 invested. Over time, Dwayne can boost his investment returns without added effort.

Seeking Professional Help

Navigating the federal benefits system can be overwhelming.  Emily, a federal employee with 15 years of service, sought out a financial advisor trained in federal benefits to help her understand her options. She found an advisor with specialized skills and education and was confident her retirement income planner understood her complex benefits package. Since her advisor was a “fiduciary” advisor, Emily felt more secure, knowing her benefits expert was legally obligated and ethically committed to working in her best interest.

State and local government employees can also profit from strategic planning.

While federal employees enjoy FERS or CSRS benefits, Frank, who works for his state’s transportation department, is part of a different retirement system. The government calculates Frank’s pension based on his years of service and final average salary. To supplement his pension, Frank contributes to a 457(b) plan, allowing him to build additional retirement income beyond his pension. Frank also realized that INCOME is the name of the game once you no longer get a paycheck. To increase his peace of mind, he opted to purchase additional permanent life insurance and an annuity to “insure” his pension and provide other sources of guaranteed income.

How Much Will You Receive in Retirement?

Federal employees’ retirement benefits vary based on years of service and their salary.  For example, Anna, with 30 years of service and a “high-3” average salary of $75,000, can expect a FERS pension of around $22,500 per year.  

But Anna is not planning on staying put when she leaves government service. Instead, she intends to start a small business and possibly get her master’s degree.  To fund these aspirations, Anna and her benefits advisor added some additional “safe money” investments that give her more income and greater liquidity, flexibility, and control of her money.

Conclusion

Planning for retirement as a federal employee requires a multifaceted approach and a long-term mindset, along with guidance from a financial professional who understands how federal benefits work. By understanding your benefits, maximizing contributions to your TSP, and seeking professionaladvicee, you can fill in benefits gaps and build a secure financial future.  

For more helpful advice on how you can TURBOCHARGE your federal benefits, get my free federal retirement guide.  CLICK HERE: