By Eric Rolshoven, MBA
The reality is a solid retirement plan is different for everyone, but especially for government employees. When it comes to government employee retirement plans, it can be even more complicated to find out your exact benefits and how they’re calculated. It’s important to ask the right questions so you can get the most out of your retirement when the time comes. So, here are some of the most important questions to ask when it comes to your retirement plan.
What Is the Federal Employees Retirement System (FERS)?
If you work for the U.S. government or public sector, your retirement is a combination of three plans: a basic benefit plan, Social Security, and a Thrift Savings Plan (TSP). These all fall under the Federal Employees Retirement Plan (1) (FERS). Although these plans have the same purpose, they’re different and require special attention so you can get the most benefits out of each.
How Is My Basic Benefit Plan Calculated?
Essentially, your basic benefits plan is a pension that’s deducted from every single paycheck. Regardless of how much you’ve contributed, you receive a set amount every month. How much you receive depends on two factors: your length of service and the “High 3” average.
This average is created by looking at your three highest-grossing consecutive years. Typically, your final three years of work are your “High 3,” but if you possibly took a pay cut closer to retirement, then these years may fall earlier in your career. It’s also important to note that it only takes your base salary into consideration; other payments such as overtime or bonuses aren’t included.
When Should I Take Out My Social Security?
Social Security is one of the most common retirement plans, and government employees pay the same rate as private employees. You can withdraw Social Security starting at age 62, but it’s not the best way to maximize your benefits. By accessing your Social Security this early, you reduce your monthly benefits (2) by a small percentage each month before your full retirement age. However, if you delay your benefits until you turn 70, your benefit payout will increase.
It’s also important to think about whether or not you’ll continue working until your full retirement age. If you withdraw your benefits too early, there could be a penalty if you’re younger than your full retirement age. This is why you should consult with an advisor who can help you decide what’s best for your situation.
How Is My Thrift Savings Plan Calculated?
The TSP is probably one of the best retirement funds out there. Many government workers prefer it because it functions the same as a 401(k) for a few different reasons. A TSP often receives the same tax treatment as the 401(k) and 1% of your paycheck gets deposited into the plan. And most importantly, your employer can match (3) your contributions up to 5% of your pay.
Should I Withdraw My Pension As an Annuity or a Lump Sum?
This question can be answered best by a professional. Every individual’s needs are different and it requires a closer look at your financial situation. However, deciding between the two depends on how large of a tax burden you can take on. Withdrawing your pension as a lump sum could increase your tax burden, forcing you to pay more taxes up front. Receiving it as an annuity spreads out your tax burden over time, so it doesn’t seem as large of a cost.
Reach Out to a Professional
If you’re unsure how these plans fit into your personal retirement fund or have additional questions about your plan, reach out to an advisor today. We at Treasure State Retirement Planning are retirement income specialists. We focus on your long-term financial goals so you can achieve financial security and retire worry-free.
Whether you would like to discuss your retirement income or have specific questions about your government employee retirement plan, we would like to be your trusted advisor. Schedule an appointment using my online calendar or watch my Social Security webinar for more information.
About Eric
Eric Rolshoven is founder and senior financial advisor at Treasure State Retirement Planning, an independent investment management firm in Florence, Montana. With over 30 years of experience in the financial industry, Eric focuses on providing his pre-retiree clients with customized insurance and financial strategies to protect and grow their assets, achieve financial security, and retire worry-free. Eric is known for explaining advanced financial concepts in an easy-to-understand manner and sees part of his job as helping to bridge any knowledge gaps for pre-retirees and retirees. Eric specializes in helping people maximize their Social Security benefits and holds frequent seminars and workshops in order to help his community be better informed about their financial options. Eric holds a Master of Business Administration with an emphasis in Finance from the University of Montana. When he’s not working, you can find Eric spending time with his wife, Julie, and their two grown children. Eric is a veteran Scout leader and baseball coach and enjoys hunting, fishing, hiking, golfing, and traveling. To learn more about Eric, connect with him on LinkedIn.
Disclaimer/Legal
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
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(2) https://www.ssa.gov/benefits/retirement/planner/agereduction.html