When my sister Angie and I started our financial services business, Genuine Financial Advisors, we did so because we discovered, through circumstances in our own family, that failing to plan can have devastating consequences, especially in retirement.
Mistakes made in any phase of a person’s financial life will almost certainly have a magnified impact once they no longer receive a paycheck.
This fact is, we learned over time, especially true in families where the breadwinner(s) is a Federal employee. While government benefits are unique and exceptionally generous, understanding, and correctly utilizing those benefits is challenging for employees, even those with years of service.
We found that Federal employees are often left alone, without the help and expertise needed to navigate the complexities and nuances of their benefits packages. This lack of assistance leads to them failing to take advantage of programs that could make retirement less stressful and more profitable. Federal employees are also prone to make mistakes, which will prove difficult, perhaps even impossible, to rectify once they’ve retired.
If you or someone in your family is a Federal employee, you should be aware of some of the more common mistakes that can happen when taking advantage of your benefits.
1.Failure to get help: Many Federal employees don’t believe training, personalized benefits reviews, or seminars apply to them in the early years. They think that it’s a waste of time to take advantage of workshops or classes until they are closer to retirement age. Nothing could be further from the truth. Federal benefits have a degree of complexity, including strict time deadlines and other rules. Learning these nuances as early as possible in your career will go a long way toward helping you take full advantage of the programs available to you. Fully understanding the benefits you are offered will help you save money, maximize your current position, and become better prepared for retirement. For example, my company provides thorough, customized benefits and retirement reviews that save our clients thousands of dollars and hours of frustration.
2. Neglecting to have a retirement plan at all: Failure to plan is a mistake made by nearly all working people. It can and does create stress and chaos once you are no longer drawing a paycheck. For example, many federal employees end up with just 70% of the income they could have had when they retire. For most, this is not going to be enough.
3. Not having a TSP Blueprint: Many of the most common mistakes specific to federal employees involve their TSPs (Thrift Savings Plans). These plans are the cornerstone retirement vehicles for many federal employees. That’s why it is so critical to make it your goal to maximize this benefit and take advantage of the 5% government match. This match option is free money the government is willing to give you. Amazingly, though, many federal employees do not participate. If you are a FERS employee, you should contribute at least 5% to your TPS account. In addition to the match option, another TSP consideration is finding the best distribution options when the time comes to access your funds. For example: Is it better to take the lifetime annuity? Should you transfer the balance into your separate IRA?
4. Overpaying for FEGLI Option B: FEGLI (The Federal Employees Group Life Insurance) is the most extensive group life insurance program in the world. It’s an integral part of your federal benefits package. Even if you are a new government employee, you have basic life insurance coverage. You pay 2/3 of the cost for this benefit, while the government pays 1/3. With primary coverage, your age does not determine the cost. However, if you add any of the optional insurance offered, you pay the FULL COST, which is determined by age. For example, Option B allows you to elect to increase that coverage from one to five times your base rate of pay. This is great when you’re younger. However, starting at age 35, the cost of this increase begins to go up dramatically to the point where employees start dropping their coverage when they need it the most! Contact me, and I can show you some better, less costly options for increasing your coverage.
5. Not purchasing back prior military time: In many instances, federal employees served time in the Armed Forces but did not serve long enough to be eligible for military pensions. If this situation applies to you, you are allowed to purchase that time back and have it count toward calculating your federal retirement. To get the credit, you must make your deposit in full before retiring. Our staff can help you complete the necessary paperwork to get your estimated military earnings and deposit amount.
6. Making the incorrect Survivor Benefit Selection: The Survivor’s Benefit Plan (SBP) is a way for your spouse to get a percentage of your pension should you die first in retirement. Providing this benefit means you will receive a reduced retirement annuity. For most people, this is not a great insurance product. For one thing, unlike traditional life insurance, the SBP benefit is taxable. Another downside is that it is paid out monthly instead of in a lump sum. The main reason federal employees opt to take an SBP option is that Federal Employee Health Benefits (FEHB) is attached to it. If an employee wants to ensure that his or her spouse will continue to have the FEHB, they must elect at least a minimum SBP option, or their health benefits will die when that employee dies. The SBP decision is almost always permanent, so be sure to consult an expert before making your choice.
7. Failing to update beneficiaries: It would help if you always kept beneficiates up-to-date for your federal benefits and all other accounts. This is especially important when it comes to your TSP. If you fail to file a Designation of Beneficiary form with the TSP and you pass away, the money in the TSP will be distributed according to the legal order of precedence, which may or may not be the order you desire. TSPs do not honor wills, separation agreements, trust documents, court orders, or a prenuptial. Instead, they are only allowed to pay beneficiaries properly designated on Form TSP-3. You should review your TSP-3 regularly to make sure it accurately reflects your current situation and desires.
Having an outstanding TSP loan when you leave service or retire: When you leave federal service with a TSP loan balance, you have 90 days to pay off this balance. Failure to do so means the IRS will declare it as a taxable distribution and you will be subject to penalties and taxes. These can be substantial and are likely to create problems in retirement. Call our office now to learn how to avoid this situation.
These are just a few potential landmines that can create anxiety for federal employees who want to retire more easily with less stress, more income, and fewer worries.
You can’t hope to announce your retirement one day and then expect a government HR person to hold your hand and guide you through the process. This isn’t going to happen for a variety of reasons. Instead, create the retirement of your dreams by partnering with an experienced financial advisor who has been trained in the many pitfalls of federal benefits