According to the Office of Personnel Management (OPM), over 2 million employees are part of the US workforce. In CO, over 50,000 are employed by one of the many government agencies, led by the Army, Navy, Dept of Veterans Affairs, Department of Interior, and the National Parks Service.
The majority of employees will fall under the retirement rules known as FERS (Federal Employee Retirement System), which replaced the CSRS (Civil Service Retirement System) with workers entering federal employment after 1987. In addition, many CSRS employees were eligible to switch to the FERS or have retired, resulting in less than 4% of the total fed employees remaining under the old system.
Mistake #1: Understanding the Government Pension Offset (GPO)
We get a lot of questions from FERS employees as well as career Armed Services employees about the GPO and WEP rules for Social Security. The rules only apply to CSRS employees. Those public-sector employees will see their Social Security benefits reduced by two-thirds of the non-Social Security retirement benefit. For example, if you receive $3,000 as a government pension, two-thirds of that benefit, or $2,000, will be deducted from any Social Security spousal, ex-spousal or survivor benefits you would otherwise be entitled to. Under this rule, lump sum payments of non-Social Security benefits are converted to a monthly annuity payment using a Social Security formula, so rolling these benefits to an IRA does not eliminate the reduction. Again, this will ONLY affect CSRS employees, not those in the FERS system or Armed Services retirees that do contribute to social security.
The GPO rule is similar to the WEP in that it was intended to treat public-sector employees the same way they would be treated if they spent their career in the Social Security system. Unlike the WEP, which affects only “worker” benefits, the GPO provision impacts spousal, ex-spousal and survivor benefits
Whereas employees who have worked 30 years or more in the Social Security system with “substantial” earnings in addition to their public-sector earnings are exempt from WEP, that is not the case with GPO. Another critical difference is that the GPO reduction can completely eliminate the Social Security benefit you may receive as a spouse, ex-spouse or survivor. The GPO does not apply to CSRS spousal benefits.
Mistake #2: Maintaining Health Benefits
Under the FEHB (Health Insurance) rules, a federal employee must retire on an immediate annuity (beginning within 30 days of retirement) or a postponed annuity under the FRA+10 rule. If you fail to elect the self plus one or self and family plan for your annuity, your spouse and/or family will not be eligible for health benefits in the case of death unless they are also federal employees.
It is critical to make the correct election for your annuity to ensure that your benefits continue. Additionally, if you plan to retire outside a covered geographic area.
An additional caveat is that you must have been enrolled for 5 years or your earliest opportunity to enroll before you retire. You may change plans during that time frame, but, the 5-year rule should be a consideration in the election of your retirement date to ensure continuation of coverage – especially in light that the government covers nearly ¾ of the premiums and that health coverage costs have increased at a rate well in excess of normal inflationary rates.
Another option to consider for families who are in good health is that Medicare may be a less expensive option. If this is the case, you can SUSPEND your FEHP benefits, but DO NOT CANCEL, as you will not be able to reinstate.
Mistake #3. Not Putting a Plan Together that Encompasses Future Expenses
While this is certainly not just a federal employment issue, it continues to be one of the biggest mistakes made by retirees.
Creating a budget, planning for unforeseen life events such as disability and long-term care, as well as future housing are a critical piece of retirement planning. Utilizing a professional advisor to walk you through your life goals, potential unforeseen costs, inflation, and tax consequences, is not only sound advice, it can save you a lot of stress and frustration in the long run. Although plans can change, it is really never too soon to begin this process. A well-thought out plan that is updated regularly, can open up solutions you may not have considered and provide peace of mind.
Mistake #4: Waiting to Plan
As advisors, we regularly provide ongoing education to the community on Social Security and retirement planning for Federal Employees and other members of the community. What is clear from these workshops, is that it is often the individuals and families that are months away from retirement beginning to plan.
Understanding how retirement benefits and income will be calculated in the future is a critical component to understanding future cash flow. While federal employment benefits are often touted as difficult to understand, it is based on time of service and formulas and can be simplified by meeting with a professional that knows the rules and the exceptions.
In addition to having a basis on the FERS numbers, having an opportunity to properly invest in the TSP at early or mid-career can give you a leg up on properly investing and maximizing your investment strategies.
According to the Federal Retirement Thrift Investment Board, the agency that oversees the TSP, just 27,212 participants were part of the famed “millionaires club” at the end of the last month.
That group includes federal employees of all stripes who have, on average, been investing in the TSP for 29-plus years. Those participants have primarily stuck with the C, S and I funds, through the good times and the bad.
Now is certainly one of those “bad times.”
Compare the March total with the 49,620 TSP millionaires at the end of 2019, before the average person on the street even knew what the coronavirus was or where it came from.
At the end of 2019, the highest TSP account balance stood at nearly $7.4 million. Now, the highest account balance is $6.37 million.
These statistics demonstrate the importance of meeting regularly and ensuring that the fund elections are appropriate and will enhance the timing and probability of meeting your goals and objectives.
Covid Rules that Impact Federal Retirement
RMD rules extended: The initial rule for taking out RMDs from during period from 02/02 thru 05/15/2020 required redeposited by 07/15/2020. As of last week, the rules have changed for those withdrawals to allow for contributions to be replaced thru 08/31/2020. It also includes all 2020 withdrawals, including those taken prior February. As of now, any and all distributions from a qualified retirement plan, can be redeposited in 2020 with no RMDs required for the year. This mandate was updated just last week.
TSP / IRA Withdrawals for those affected by COVID:
While the early withdrawal penalty is waived for those affected, the IRA and TSP funds are taxed when taken. For those that need assets from these accounts during this time, you can take up to $100,000 and spread the taxes over a three-year period. If your situation changes and you do not need the funds, you can replace the funds (use as a loan).
Before taking money out of a retirement account, make sure you have a qualified COVID need for the funds. You can review what is qualified at the IRS site: https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers
The amount of leave that a federal employee can carry over is generally capped. However, the OPM (Office of Personnel Management) has announced that they will be issuing exceptions for some employees to restore “use it or lose it” time taken during the pandemic. While the specifics on how much or who it will impact has yet to be finalized, the OPM says it will exercise an exception in the traditional requirements due to a national emergency and will streamline the process for those who would be impacted and forced to forfeit additional leave.
From the memo:
The regulations will provide that employees who would forfeit annual leave in excess of the maximum annual leave allowable carryover because of their essential work during the national emergency will have their excess annual leave deemed to have been scheduled in advance and subject to leave restoration.
We will provide more on this shift as official updates become available.
For all up to date changes and impacts to your federal retirement plan and benefits, be sure to contact the professionals at our office to get clarification on any of the changes, as well as updates to the changes being made during these “interesting” times. We are happy to work with people in Colorado and across the United States.
Kelly L. St. George MBA