FERS Employees enjoy many great benefits that it can be a challenge to keep up with them all let alone try to get the most out of them all. This article will summarize your key benefits and some of the most important things to know about each one.
TSP
The TSP is an essential part of many federal employees’ retirement plan because it gives them an incredible way to fund their retirement outside of their pension and social security. This is one of the only benefits that you have more control over. Many people have become TSP millionaires through consistency and investing smart.
In investing, consistency and time trump all. Decide which mix of the funds makes sense for you and stick with it. Don’t overthink it and stick to your long term plan. Invest as much as you can (at least 5% to maximize the match) and try to increase your contribution over time.
Consider contributing to the Roth TSP to provide tax free income for yourself in retirement. You will have to weigh the cost and benefits of paying taxes now or in retirement.
Pension
Your pension is an extremely valuable benefit but it is important to know how much you’ll actually be able to spend in retirement. A few of the big things that will come out of your pension before you see it is:
Survivor Benefits
If you’d like your spouse to have a portion of your pension when you pass away it will cost you a portion of your pension now. It will cost you 10% of your pension now to leave your spouse with 50% of your pension or 5% of your pension to leave 25%. You make this decision at retirement.
Taxes
Most of your pension will count as taxable income. For many retired feds, they pay between 10%-25% in taxes between federal and state taxes.
Insurance premiums
For any federal insurance (FEHB, FEGLI, ect) that you’d like to keep in retirement, the premium will come directly out of your pension.
MRA+10 Retirement
Once you reach your MRA (minimum retirement age) with 10 years of creditable service, you are eligible to retire. That being said, your pension will be permanently decreased by 5% for every year you retire before age 62.
Make sure you take all these things into account when planning for your retirement.
Social Security
The earliest you can start drawing it is age 62. But your benefits will be reduced by every month that you begin benefits before you FRA (Full Retirement Age). Your FRA will range from age 65-67 depending on when you were born. Now if you choose to delay starting your benefits until after your FRA, your benefits will increase by 8% every year up until age 70.
If someone takes Social Security early (before their FRA) and they continue to work, their benefits will be reduced for every dollar they make in their jobs over certain limits. In this case, their benefits would be reduced for taking them early and reduced again for earning over certain amounts. Sometimes it still makes sense to continue to work in retirement just make sure you understand these limits. Once you reach your FRA, your benefits will not be reduced because of your income.
The equation can get complicated but for simplicity’s sake, if you have income over certain thresholds, up to 85% of your benefits can be taxable. For this calculation, money that is taken out of certain retirement accounts (401(K), TSP, IRA) may be counted to push your benefits into taxable zones. When you are planning for retirement, make sure you run your numbers with taxes in mind.
FEHB
Having access to FEHB is a fantastic benefit. It is the largest employer-sponsored plan in the world covering almost 9 million people. And when it comes to most insurance, the larger the group plan, the more affordable it becomes per person.
With health care costs rising every year, it is essential more feds to keep FEHB in retirement and here are the requirements to be able to do so:
-You have to be eligible to retire on an immediate retirement
-You were covered under FEHB for the last 5 years before retirement.
For those retired military federal employees in Tricare, you can often continue FEHB into retirement if you were covered under Tricare for at least 5 years before civilian retirement and were covered under FEHB on the date you retire.
Because one of the requirements is to be eligible for an immediate retirement, those leaving under a deferred retirement are not eligible to continue FEHB into retirement. Those retiring under postponed retirement are eligible to continue FEHB once they start drawing a pension. This is the big difference between deferred retirement and postponed retirement.
If you have major dental or vision medical needs, it may make a ton of sense to coordinate your FEHB coverage with a FEDVIP plan.
FEGLI
FEGLI can be broken into 4 different parts.
Basic Life Insurance
When you are hired by the government, you will be automatically enrolled in this coverage. You will pay ⅔ the premium and the government picks up the rest. This coverage is equal to your annual salary rounded up to the next $1,000 plus another $2,000.).
This is the only type of coverage that the government helps pay for. The other coverages are optional and paid solely by the employee.
Option A-Standard Insurance
This coverage is pretty simple. It is a flat $10,000 death benefit.
Option B-Additional Insurance
If your basic insurance and option A insurance isn’t enough for your needs, you can also enroll in option B. You can choose coverage in the amounts of 1, 2, 3, 4, or 5 times your annual salary after it is rounded up to the next $1,000.
Option C-Family Insurance
This option allows you to buy insurance on your spouse’s and/or childrens’ lives. This coverage can be bought for 1-5 multiples of $5,000 (ie, $5,000, $10,000, $15,000 ect) for your spouse and in 1-5 multiples of $2,500 for each child that is eligible.
Planning note: Option B premiums start to double at age 55. This can be a great time to rethink your insurance needs or look for better rates elsewhere. Depending on your health, FEGLI may or may not be your best option.
Long-Term Care Insurance
In the past, when someone got older and was unable to take care of themselves, their children often stepped in and cared for their parents. In modern times, this solution might still be applicable but there are many situations where it is not. Someone may not have kids or may not want to have to rely on their kids. Or sometimes, the children aren’t financially prepared to take on this responsibility.
This is why we now have nursing homes, assisted living facilities, respite, and home care options. The one downside of these resources is that they tend to be very expensive, especially if you need them for a long period of time. Long-term care insurance was invented to help cover these costs if someone ended up in a situation where they needed them.
You will have to weigh the pros and cons between the cost and the benefits of this insurance. Just like any other insurance, it comes down to a question of risk. How much risk do you want to take on as an individual and is it worth paying a monthly premium to transfer that risk to an insurance company? Some people never end up using the coverage while others need it extensively.
I firmly believe that everyone should have a long-term care plan. This doesn’t always have to be formal insurance, but everyone should know what they’re planning to do if they find themselves in the situation where they can’t care for themselves. By doing this planning ahead of time, it can save you and your family members a lot of money and struggle.
Conclusion
If it seemed like I only skimmed over these benefits then you’d be right. An entire book could be written (and has been written) about each benefit and a few paragraphs about each one is just scratching the surface. As a federal employee, it may not be practical to read every word on the OPM website to understand every exception and nuance of your benefits but it is important to take ownership for your retirement and future. Because at the end of the day, your federal retirement can be incredible but it won’t happen by accident.
