Federal employees have different benefits than other workers, including an annuity (or pension) and the Thrift Savings Plan program. However, navigating these benefits may sometimes be a challenge. What should federal government employees know before they retire? Here is some information about federal retirement plans, withdrawal options, and factors to consider when deciding whether to take early federal retirement.
What Retirement Plans are Available to Federal Employees?
Federal civilian employees, hired in 1987 or later, participate in the Federal Employees Retirement System (FERS).1
FERS provides retirement benefits from three different categories:
- Basic Benefit Plan
- Social Security
- Thrift Savings Plan
The Basic Benefit Plan expires when the employee leaves federal employment. After leaving the federal government, an employee may take social Security benefits and the Thrift Savings Plan to their next job.
The Basic Benefit Plan includes the federal pension. With each paycheck, the federal government withholds the cost of an employee’s Basic Benefit. Upon retirement, these funds operate as an annuity to provide the retiree with a steady source of income.
The Thrift Savings Plan (TSP) is similar to a 401(k) in the private sector or a 457 or 403(b) for government employees. Each pay period, the government deposits 1% of the basic pay to the TSP, similar to a match, and, as a federal employee, you may contribute a percentage of each paycheck, as well. TSP contributions are tax-deferred, which means they may help manage your overall taxable income.
Social Security for federal employees operates identically as Social Security for private-sector employees. However, because many federal employees are eligible for retirement far earlier than Social Security allows for early retirement at age 62, the TSP and Basic Benefit plans may help provide a source of income during the years between retirement and Social Security eligibility.
What Should Federal Employees Know About Retirement?
Here are a few facts about federal retirement that may be beneficial to understand:
- To have health insurance during retirement, the employee must carry insurance for at least five consecutive years before their retirement date.2
- FERS-covered employees who are not in a special retirement category, like military or firefighters, who retire before age 62 may lose up to 10% or more of their annuity income. The prospect of having a significantly higher annuity payment might make it worthwhile to work a year or two longer.
- Once you close your TSP account or roll it over to another account, like an Individual Retirement Account (IRA), you cannot return to the TSP program. Because there are some different benefits associated with the TSP program, it may be a good idea to talk to your financial professional before you make any changes. In some cases, you may need to leave a small amount in your TSP and transfer the rest of it to another account.
- If you and your spouse divorce before you are eligible for retirement, you may still be required to provide a certain amount of retirement benefits.
If retirement is drawing close, it may be worth looking at your TSP and other federal retirement plans to learn more about them.
Sources
1 https://www.cpsc.gov/About-CPSC/Job/Working-for-the-Federal-Government-What-Every-Employee-Should-Know
2 https://federalnewsnetwork.com/mike-causey-federal-report/2021/12/a-7-step-pre-retirement-checklist/
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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