If you’ve spent your career as a federal employee, you will know that your retirement options are one of the most powerful benefits you will receive for your years of service.
For decades you might spend dreaming and envisioning what your retirement will look like. But as your years wind down, and you get closer to officially retiring, there are some concrete steps you must take to take your dreams into reality.
This blog will walk through 8 steps you can take in your final year before retirement to prepare for the transition and make the most of your federal benefits.
Key Takeaways:
Planning your retirement should ideally happen well before your last year. But the final year is the time to get serious. Once you sign on the dotted line, you can't go back. Identifying your date of retirement and planning for how you will spend your time once you don't have to work every day is critical.
Will you travel, work part-time, or volunteer? What about expenses such as property taxes and insurance – did you account for those? When is the optimal time to collect Social Security based on your situation? Should you be looking at Roth conversions? The list goes on. Read our blog to learn 5 Questions to Make Sure You are Ready for Retirement.
If you're a FERS employee, the date you choose to retire can have a meaningful impact on your cash flow, including when your pension begins and how much unused annual leave you can receive as a lump-sum payment. There are certain days to retire each year that are better than others. Read our blog post to learn The Best Dates to Retire in 2027.
Once you feel confident in your retirement date and put it in writing, double-check that the information is correct in boxes 30 and 31 of your SF 50. It's difficult to go back and make changes once your paperwork is submitted, so be fully confident in your decision.
Once you retire, there shouldn't be any surprises when it comes to your retirement income or your expenses. Take this time to create your retirement "budget" by mapping your new income against your expected costs.
Split your spending into two buckets. Nondiscretionary covers housing, auto, food, medical, taxes, utilities, and investment or bank fees. Discretionary covers shopping, travel, dining, and everything else you'd trim in a bad year. Don't forget about property taxes, insurance premiums, vacations, and gifts. See our blog post on 5 Forgotten Retirement Expenses.
Then line that up against what's actually coming in: your FERS annuity, Social Security or the FERS supplement, and whatever you plan to withdraw from your TSP each month.
The gap between those two numbers will help you determine your distribution you could take from retirement funds, the timing of your Social Security, and more planning.
The insurance that made sense at 45 with kids at home often doesn't make sense at 60.
When looking at your Federal Employee Health Benefits (FEHB), you can carry it into retirement and pay for it out of your annuity, as long as you've been covered for the five years leading up to your retirement date. That's a big deal, because it bridges the gap until Medicare eligibility at 65. Consider if any children are about to age off your plan, and whether your current plan is still the right fit.
And for Federal Employee Group Life Insurance (FEGLI), those premiums climb steeply as you age. Often times, retirees pay for coverage that may not even need. Look into what your coverage is actually protecting and if it is necessary. For example, do you have a mortgage that's nearly paid off, or a spouse who'll already be covered by a survivor annuity?
The Thrift Savings Plan (TSP) may be the most important variable in FERS, because it's the one you control. Your annuity and Social Security are decided by formula – salary, years of service, age – with little room to deviate. Your TSP is the piece that flexes, and it's the piece that can be the difference in achieving the retirement you've always wanted.
You also have flexibility in your TSP of how you’d like to receive your funds, including partial withdrawals, a full withdrawal as either a lump sum or a direct transfer to an IRA, and installment payments on a monthly, quarterly, or annual basis.
TSP withdrawals come out pro rata, evenly across every fund you hold, proportional to its size. If a stock fund is 25% of your account, 25% of any withdrawal is sold from it, whether or not that's a good week to be selling stocks.
Your level of risk and method of distribution really depends on your personal situation and your future goals. But it is important to consider all of your available options for your TSP, and decide on the strategy that works best for you.
At 65, you'll be making a coordination decision, not just an enrollment decision. Some retirees keep FEHB and add Medicare Part B; others reduce or drop FEHB depending on which Medicare or Medicare Advantage plan they choose.
Take your health care costs into account as you build your budget in Step 3.
Within six months of your retirement date, request a FERS estimate of your pension. When it arrives, don't just look at the gross number, look at what comes out of it.
Your annuity will be reduced by whatever you've elected including:
It’s also important to know that pensions aren’t processed until after the retirement date. That means for many retirees, it could be 3 to 6 months before you receive your first full pension check. You'll get interim payments in the meantime, but they're typically smaller than your actual pension.
Whereas your annual leave payout lands in your final paycheck and can serve as a bridge until the first full check shows up.
This is the step that often gets forgotten about, while also being one of the quickest to complete
Confirm the beneficiary designations on your TSP, your FERS annuity, your FEGLI coverage, and every investment account. These designations will override any information found in a Will, so it is critical to make sure everything is up to date upon retirement.
Revisit this step yearly, or sooner after a marriage, divorce, death, or move.
With so many variables to consider, the final stretch before retirement can feel overwhelming. But you don’t have to go through it alone!
A financial adviser can look at your entire situation to build a retirement plan that meets your short- and long-term goals. Bonus points if that adviser is an expert in FERS. If you’d like to speak with an adviser who is experienced in FERS, schedule a complimentary consultation here.
And if you’re looking to learn more about federal retirement benefits, download our guidebook: FERS Made Simple: Understanding and Maximizing your Benefits.