“If you are a federal or state employee planning to retire in the next year, you should waste zero time planning your exit.”- George Politarhos
If you are like most federal employees under the Federal Employees Retirement System (FERS), you have numerous things to consider. Many Federal, State, and local employee programs complicate retirement planning by having multiple moving parts such as filing deadlines, tax considerations, beneficiary issues, and strict application form requirements.
Making matters more stressful for government pre-retirees is that many experts believe that the pandemic’s impact will extend far into 2021. The lingering economic effects of COVID-19 are resulting in what some economists predict will be a “tsunami” of retirees. If you want to be ahead of that wave, planning needs to start immediately, ideally with the help of a qualified financial planner or tax planner. Your team of experts must include those who are well-versed in government retirement programs’ nuances and pitfalls. It’s easy to make mistakes when exiting the government workplace. Some of the most common errors of which you should be aware include:
Failing to assemble the right team of experts to assist you.
Your HR department’s job is not to provide advice on how to create a better retirement. Instead, both HR and OPM (in federal employees) exist to provide education and information. It’s up to you to use that information to create your retirement blueprint.
Not understanding tax implications and how to avoid paying too much tax. Employees often do not understand the long-term impact of taxes on their retirement lifestyles.
Many times these employees believe the myth that taxes in retirement will be less. A lack of knowledge about taxes often results in a person paying more than is legally required.
Failure to check and double-check retirement computation and eligibility
Eligibility and retirement computation can be tricky when it comes to government-sponsored retirement plans. For example, employees leaving government service sometimes don’t know the difference between their “leave” service computation and their “retirement” service computation dates. Many employees also don’t realize they don’t have to wait until applying for retirement to determine their retirement service computation date. This critical metric can actually be calculated earlier than application time. Talk to your HR or OPM representative to found out how to do so.
Not knowing the correct sequences for turning on your retirement benefits.
FERS, for instance, is a three-part system. It consists of the government pension portion, Social Security, and Thrift Savings Plan. When you decide to retire, you are not required to activate all three benefits simultaneously. A strategic approach to determine which component to activate first can help your money work harder for you.
Not allowing enough time for a claim to be adjudicated. Transitioning from Federal or State employee to retiree is a paper-heavy, time-consuming affair. Be sure to allow for a process that can take months.
Not considering the need for long-term care insurance. Administered by the U.S. Office of Personnel Management, the Federal Civilian Long Term Care Insurance Program or FLTCIP is available to most Federal government employees. State and local governments offer similar plans, often at a more inexpensive rate than private LTC insurance.
Long-term care costs can destroy savings and upend retirement plans. You and your advisor should include a long-term care strategy within your retirement blueprint, whether using FLTCIP or another option.
Mistakes with beneficiaries. Government employees, as well as private-sector employees, sometimes underestimate the importance of correctly adding beneficiaries. For example, they might forget that instead of designating named beneficiaries, they can instead use the standard order of preference as an option. They also fail to update beneficiaries when life events occur.
Not understanding health insurance options. The Federal Employee Health Benefits plan is the most extensive group health insurance plan in the world. FEHB may not be the best option for every Federal employee, however. Other health plans might work better in your particular situation. For example, if you use a health savings account (HSA), you might save money with a higher deductible private health plan. It would help if you discussed the choices with a qualified health care insurance specialist.
The bottom line: A successful retirement does not happen by accident, even for those who have generous government benefits. Tax planning, health insurance options, providing for long-term care needs, and life insurance are critical components of your financial plan. Critical factors in making the best retirement decisions include:
- Early planning.
- Engaging with qualified financial professionals.
- Educating oneself about every available option.
- Understanding the long-term consequences of every decision.
If you’d like to discover other retirement planning mistakes that can cost you money, contact me. Our office specializes in maximizing your government benefits, shielding them against adverse events, and helping you create a legacy for loved ones.