There are numerous caveats within each of the primary federal retirement systems that are critical for you to understand, especially as the benefits and benefit computations of each are under attack like never before. It is more critical than ever to understand your options and opportunities so as to arm yourself with the information critical to being able to make an informed decision.
For employees hired after 1984, this retirement system is comprised of 3 primary components - the FERS pension, the TSP, and Social Security. The TSP part of FERS is an account that your agency automatically sets up for you. Each pay period your agency deposits into your account amount equal to 1% of the basic pay you earn for the pay period. You can also make your own contributions to your TSP account and your agency will also make a matching contribution. These contributions are tax-deferred. The Thrift Savings Plan is administered by the Federal Retirement Thrift Investment Board.
The Civil Service Retirement Act, which became effective on August 1, 1920, established a retirement system for certain Federal employees. It was replaced by the Federal Employees Retirement System (FERS) for Federal employees who first entered covered service on and after January 1, 1987. The Civil Service Retirement System (CSRS) is a defined benefit, contributory retirement system. Employees share in the expense of the annuities to which they become entitled. CSRS employees may increase their earned annuity by contributing up to 10 percent of the basic pay for their creditable service to a voluntary contribution account.
LEOs and a few legislatively designated groups, including federal firefighters and air traffic controllers, are eligible for enhanced retirement benefits under the Civil Service Retirement System (CSRS), for individuals hired before 1984, or the Federal Employees’ Retirement System (FERS), for individuals hired in 1984 or later. In general, law enforcement personnel are subject to mandatory retirement at age 57, or as soon as 20 years of service have been completed after age 57. The maximum age of entry, which is intended to ensure full retirement benefits upon reaching mandatory retirement age, is typically age 37.
Federal Employees Group Life Insurance
What it is
The Federal Government established the Federal Employees' Group Life Insurance (FEGLI) Program in 1954 to provide group termlife insurance. FEGLI can help you meet your life insurance needs and is especially cost effective early in your career. Federal employees, Federal retirees (if they meet certain criteria to continue the coverage into retirement), and their family members can be covered under Basic and Optional insurance.
If you are an eligible employee you are automatically covered for Basic insurance, and have three Optional insurances you can elect.
Option A-Standard equals $10,000;
Option B-Additional equals 1-5 multiples of your salary;
Option C-Family equals 1-5 multiples of coverage for your eligible family members.
----Opt C: Each multiple equals $5,000 for a spouse, $2,500 for each child.----
What it isn't
The Premiums associated with the FEGLI increase each time the employee enters a new age bracket (every 5th year). Since it is term coverage, it is pure death insurance, meaning that it has no potential for Cash Value Accumulation nor the necessary flexibility of Accelerated Living Benefits.
Who's it for
FEGLI group term coverage is offered to eligible Federal Employees without a medical exam or any other limitations on participation. This can make it an attractive option for those individuals with preexisting health conditions, poor driving records, unhealthy habits, or dangerous jobs. For Postal Employees the Basic coverage is paid for by USPS. As the individual ages, the costincrease associated with each new age bracket will continue to climb dramatically . From age 50-60 the cost of the FEGLI increases 200%, just to keep the same amount of protection. It is during this 10 year window that many Federal Employees attain their MRA and required years of service to be eligible for retirement. When living on your retirement income, the increased cost is often to high to maintain the desired level of coverage.
Thrift Savings Plan
The Thrift Savings Plan is a Retirement Savings accumulation vehicle available to Federal Employees. It is a Defined Contribution Plan, similar to a 401(k), that offers 5 different investment funds, multiple Lifecycle funds, and employer matching up to 5% on Traditional and Roth combined contributions. One of the main benefits offered by the TSP is a low cost of maintenance (relative to many corporate 401(k) plans) which is available because of the huge number of participants paying these fees, keeping the individual costs low. Contributions made to one's TSP can either be made on a tax-deferred basis (Traditional Contributions) or made on an after-tax basis (Roth Contributions). The employer match of up to 5% is only made into Traditional balances, regardless of how the employee designates personal contributions ( meaning the agency never contributes on an after-tax basis). Traditional TSP Contributions are considered Qualified Funds which means that they will not incur Income Taxes until distributed from the TSP in your retirement - at potentially higher future Income Tax rates.
The Roth TSP differs from the Traditional TSP in the tax treatment of the contributions and distributions. In the Traditional TSP you are deferring taxes, meaning your contributions actually "lower" your taxable income for that current year as far as the IRS is concerned by contributing it to the TSP with an "IOU" attached to it. By deferring taxes you are choosing to wait to pay taxes until you pull the money out in the future.
In the Roth TSP, you pay taxes before putting the money in, which allows you to pull the money out later tax free (so long as certain requirements are met)! This allows the Federal Employee to hedge against higher tax rates in the future by paying a known rate today before investing rather than an unknown rate later.
Traditional planning has always preached deferring taxes in order to pay them when you withdraw the money in retirement at a lower income tax bracket. But for well prepared FERS & CSRS Retirees t receiving 80%+ of their working "High-3" this often means that their retirement income is taxed at the same bracket as their working Federal Salary.
How does a Federal Employee enter a lower tax bracket in retirement?
Receive less income overall (negatively impact lifestyle by receiving less money)
Receive less taxable income (by utilizing Roth TSP, Roth IRAs, and Cash Value Life Insurance)
Why is this discussion so important?
Because CSRS pensions are 100% taxable and FERS employees that only utilize the Traditional TSP face income taxes on their pension, on the majority of their social security (either 50% or 85% of it will be taxable), AND on their TSP distributions. Meaning a tax rate increase would impact each aspect of retirement income and negatively affect the retirement lifestyle enjoyed by the retirees in both systems.
Where will taxes go from here?
If it is your personal belief that the government will have to raise taxes as the Baby Boomers leave the work force and begin stressing entitlement programs such as Social Security and Medicare, then you need to discuss with a CPA and a Federally Focused Financial Adviser strategies to protect your retirement income from Uncle Sam's outstretched hand!