Key Takeaways:
- Federal employees need to stay on top of retirement planning updates and maximize their benefits to ensure financial security.
- Understanding your retirement options—especially within FERS, TSP, and healthcare benefits—is crucial for a smooth transition into retirement.
Time is Ticking—Don’t Wait to Review Your Benefits
If you’re nearing retirement, now’s the time to dig into the details of your federal retirement benefits. I’ve seen too many people put this off, only to face last-minute surprises that could have been avoided. Whether you’re planning to retire this year or a few years down the road, getting a handle on your benefits is essential.
- Also Read: Are You Eligible for the Federal Employee Retirement System (FERS)? Find Out Here
- Also Read: Why TSP Withdrawal Options Might Be More Flexible Than You Think for Federal Retirees
- Also Read: The Top Federal Employee Benefits You Should Be Tapping Into Right Now
Know the Basics of Your FERS Annuity
Let’s start with the foundation: your FERS annuity. If you’ve worked long enough as a federal employee, this will be a critical part of your retirement income. Your FERS annuity is calculated based on your length of service and your “high-3” average salary, which is the average of your three highest consecutive years of basic pay.
The formula for calculating your pension is simple:
Years of service × 1% of your high-3 average salary (or 1.1% if you retire after age 62 with at least 20 years of service).
For 2024, FERS annuitants are seeing a 2% Cost-of-Living Adjustment (COLA). While that might seem small, it’s an important increase, especially considering that recent COLAs were much higher—7.7% in 2023 and 4.9% in 2022. This shows how inflation affects your pension, and understanding this helps you prepare for retirement with a clearer picture.
Why You Should Pay Attention to the TSP
One thing every federal retiree needs to be thinking about is their TSP. The TSP is one of the most valuable retirement savings plans available, and its structure is similar to a 401(k) plan in the private sector.
In 2024, the TSP contribution limit has risen to $23,000. If you’re over 50, you can also make catch-up contributions, which remain capped at $7,500. If you haven’t been maxing out your TSP contributions, now is the time to take advantage of these limits before you retire.
The TSP offers several investment options, from the ultra-safe G Fund to the riskier C Fund. You should carefully evaluate your risk tolerance at this stage of your life. Most people approaching retirement tend to shift towards safer investments to protect what they’ve built, but your strategy may differ based on your financial situation.
The Importance of Planning Your Healthcare Costs
As a federal employee, one of the biggest perks is continued access to the Federal Employees Health Benefits (FEHB) program after retirement. However, you’ve probably noticed that healthcare costs are rising faster than inflation. In 2024, FEHB premiums are increasing by an average of 13.5%.
Retirees often coordinate FEHB with Medicare to reduce out-of-pocket costs. You’re eligible for Medicare at age 65, and enrolling in Medicare Part B is crucial if you want to avoid penalties and maintain full FEHB coverage through programs like the Postal Service Health Benefits (PSHB).
Medicare Part B premiums are an additional cost to consider, but many federal retirees find that this coordination significantly reduces their overall healthcare expenses. I’d recommend looking into your options early and deciding how you’ll manage healthcare costs in retirement—whether you’re going to stick with FEHB, switch to Medicare, or use both together.
Early Retirement? Here’s What You Need to Consider
If you’re thinking about retiring early, let’s talk about the Minimum Retirement Age (MRA). For those of you under FERS, the MRA varies based on your birth year, but for most, it’s between 55 and 57. You can retire at your MRA if you’ve worked for at least 10 years, but there’s a catch—you’ll face a reduction in your annuity if you retire before age 62. Specifically, for every year under 62, your annuity will be reduced by 5%.
This reduction can add up fast, and it’s important to weigh the benefits of retiring early against the financial hit you’ll take. Many federal employees find that working a few extra years, especially past age 62, can significantly increase their pension and avoid early retirement penalties.
Survivor Benefits: Don’t Overlook This Critical Decision
When it comes to retirement, one decision you’ll need to make is whether to provide for your spouse or other dependents after you pass away. FERS offers a couple of survivor benefit options, and while it’s an added cost, not opting in could leave your spouse without significant income.
If you elect the maximum survivor benefit, your spouse will receive 50% of your annuity after you die. You’ll pay for this, as your annuity will be reduced by 10% to cover the cost of survivor benefits. There’s also a smaller option that provides 25% of your annuity to your spouse, with a reduction of 5% to your annuity.
It’s an emotional decision, but it’s critical to consider how much income your spouse will need after you’re gone and what other sources of income they might have, like Social Security or their own retirement savings.
Consider Your Social Security Benefits
Don’t forget that, as a federal employee under FERS, you’re also entitled to Social Security benefits. You can start claiming these benefits as early as age 62, but keep in mind that claiming early means permanently reduced payments. In 2024, the Social Security taxable earnings limit is $168,600, and you contribute 6.2% of your income to Social Security, so it’s worth thinking about how Social Security will fit into your overall retirement plan.
Delaying Social Security until your full retirement age (typically 66 or 67) or even later could significantly boost your benefits. For each year you delay past your full retirement age, your Social Security payments will increase by 8% until you reach age 70.
Get a Clear Picture Before You Go
Before you walk away from your federal career, take the time to get a clear picture of your financial future. Your FERS annuity, TSP, Social Security, and healthcare costs all work together to create a complete retirement package, and understanding each piece will help you avoid surprises down the road.
A good place to start is by using the Federal Ballpark Estimate, a tool that gives you a quick snapshot of how much income you’ll need in retirement and whether your current savings and benefits will cover it. Planning is key, and the sooner you start, the better prepared you’ll be for whatever the future holds.
Prepare for a Secure Retirement with These Key Strategies
Your federal retirement benefits are designed to offer you financial security, but only if you take full advantage of them. Make sure you’re up to speed on everything from your FERS annuity to your TSP, healthcare options, and Social Security benefits. By planning ahead, you can enjoy a more comfortable and stress-free retirement.
