You work hard for years and save money in your TSP (Thrift Savings Plan) for your retirement from federal service.  If for some reason you die before you retire, or at some point after you retire and there is still money in your TSP account – do you know where it will go?  When you die you may have a spouse or children that you want to leave your money to but it is important to have specified a beneficiary beforehand so that there is no confusion over what to do with your hard earned TSP account.

Many individuals mistakenly think that their will, prenuptial agreement, or other court order will inform individuals where their TSP should be distributed but this is not the case.  The TSP does not use any of these documents to determine where to distribute your death benefit payments.  For this reason, it is important to file your TSP-3 form as soon as possible.  When you fill out your TSP-3 form you can designate one or more individuals, a trust, a corporation, your estate, or another legal entity to be the beneficiary of your account.  Further, you can designate who will be a contingent beneficiary should one of your primary beneficiaries die before you do.  It should also be noted that if your life circumstances change for any reason (divorce, separation, remarriage, birth of a child, adoption of a child, etc.) and you want to change who will receive your TSP account balance, you must file a new TSP-3 form or your original designation will be who receives your death benefits, even if you are separated or divorced.  If your spouse is also a federal employee and you die, your spouse can merge your TSP account with their own if so desired.  Additionally, if your spouse is not a federal employee and you die, they can choose to leave the money in your TSP account until needed.  And, if your beneficiary is not your spouse, they can opt to have the money transferred to an IRA account.

If die and you do not have a TSP-3 form filled out, your TSP account will be distributed according to the federal benefits standard order of precedence, as follows:

1. To the beneficiary (or beneficiaries) designated by the participant on a properly completed and filed Form TSP-3, Designation of Beneficiary.

2. If there is no designated beneficiary, to the widow or widower;

3. If none, to the child or children and descendants of deceased children by representation;

4. If none, to the surviving parent or parents;

5. If none, to the duly appointed executor or administrator of the estate;

6. If none, to the next of kin who is entitled under the laws of the participant’s domicile on the date of the participant’s death.

If you are uncertain whether or not you have filled out a TSP-3 form or want to ensure that you TSP benefits go to the right person, speak to an experienced federal retirement planner who can assist you.

No matter what age you are or what stage you are at in your career, defining your federal retirement objectives is a critical part of your federal retirement planning.  Sometimes determining how much money you need for retirement can feel like a guessing game.  How can you know what you will need in 20, 30, 40 or 50 years?  Determining how much money you will need for retirement is best guided by defining your federal retirement objectives.  Once you know how you want to live in retirement and what you hope your life will look like in retirement you can factor that into things like cost of living and medical expenses to determine how much you need to start saving for your retirement.  Unfortunately, there is no “one-size-fits-all” calculator that can just give you what you need.  Whether you have already spoken to a federal retirement planner or are anticipating your meeting, defining your federal retirement objectives is one of the first steps in successful planning.

First, it is important to start your ideal vision of retirement and scale back if necessary.  What does your dream retirement look like?  Do you want to travel?  Do you want to golf on a weekly basis?  Do you want to contribute to charity?  Do you want to help financially support family members?  Do you want to dine out often?  Most people want to be able to enjoy life in retirement with the peace of mind that they have the finances available to live comfortably and do the things that they want to do so that they still enjoy life. Next, it is important to take into consideration cost of living.  Do you want to continue to live in the home you live in now?  Do you want to live in a retirement community?  Do you want to own a vacation home somewhere?  Living expenses tend to increase over time so knowing what type of home and living arrangement you would like to have can help you anticipate your financial needs.  Additionally, even if you do not plan to live in a retirement home or care facility, the need can sometimes arise due to life circumstances or health conditions.  Care facilities can be quite expensive so it may be a good idea to build a financial cushion in for that so that you can live in the best home for you at that stage of life.

All of these things are important factors in defining your federal retirement objectives but it is also important to determine at what age you hope to retire.  For example, you will need more money if you plan to retire at 57 than if you retire at age 70.  If you want to retire as soon as possible, you need to save as much as possible so that you do not run out of money or have to sacrifice your dream retirement.  Further, if you properly invest funds, your finances can grow significantly as opposed to simply putting them in a bank account and leaving them there for retirement.  With defined retirement objectives and the guidance of a financial advisor well versed in the federal employee retirement system, you can anticipate and properly save for your dream retirement.

When it comes to retirement from a career working for the federal government, there are a lot of different options.  No two retirements look the same.  People retire at different ages, at different stages of their career, and for a variety of different reasons.  VERA is a term that all federal employees should be familiar with because it stands for Voluntary Early Retirement Authority and it is what we are talking about when discuss whether or not you should opt to “early out” for retirement.  It is important to know that you must be eligible to early out, not everyone can be granted VERA.  There are 4 government requirements for an employee to be granted VERA:

1. Meet the minimum age and service requirements –
   • At least age 50 with at least 20 years creditable Federal service, OR
   • Any age with at least 25 years creditable Federal service;
2. Have served in a position covered by the OPM authorization for the minimum time specified by OPM (usually 30 days prior to the date of the agency request);
3. Serve in a position covered by the agency’s VERA plan; and
4. Separate by the close of the early-out period.

In essence, if you opt to early out for retirement, you are able to retire and receive an immediate annuity many years earlier than ordinary eligibility would mandate.  VERA was implemented for agencies that may be struggling financially, restructuring, reshaping, downsizing, transferring function, or reorganizing to temporarily lower the age and service requirements in order to increase the number of employees who are eligible for retirement.  For an agency to be able to offer employees VERA they must apply and receive approval from the Office of Personnel Management (OPM).  Typically, agencies are granted VERA for a period of time and employees must choose to early out within that window of time.

While an early retirement may sound great, there are some important considerations.  For CSRS employees, there is a penalty.  The Office of Personnel Management explains how the annuity will be calculated if you opt to early out, “Annuity is calculated based on the average high-3 salary and years and months of creditable service. Unused sick leave can be used for additional service credit. If the employee is under age 55, this calculation is reduced by one-sixth of one percent for each full month he/she is under age 55 (i.e. 2% per year).”  So, in essence, your annuity will be penalized by a small percent but, if you have not yet saved enough for retirement, that could impact your ability to live on your retirement income in the long run.  The OPM also notes that there is no annuity penalty for FERS employees who choose to early out but the Special Annuity supplement will not be provided until the minimum retirement age is reached.  Determining what the right step is for you can be confusing because there are a lot of calculations to consider and planning to be done.

If you are a federal employee, your TSP or Thrift Savings Plan is one component of your retirement benefits provided by the federal government.  The TSP is a defined-contribution retirement savings plan that functions in a similar way that an employee 401k functions in the private sector.  Money can be invested pre-tax or after tax, employees can enjoy matching contributions from their agencies, and there are different fund options in which you can invest.  There are 5 individual funds as well as 5 Lifecycle funds that are a mix of the individual funds. When choosing how to invest in your TSP it is important to take a variety of factors into consideration so that you can maximize your savings for your retirement.  Below are 3 tips for TSP investing that we recommend.

3 Tips for TSP Investing

1. Start Saving as Soon as Possible
   • Regardless of what age you are right now, start saving in your TSP as soon as possible. It may feel strange to be saving for retirement at 20 years old but the more you save now, the more you will have when you reach retirement age.  And, if you have not yet begun saving and are already mid-career or late in your career, there is still time to save!  In fact, the federal government allows you to make catch-up contributions which are extra deposits that you make to your TSP once you turn 50 years old.
2. Contribute 15% of Your Salary
   • It is important to contribute as much as you can to your TSP account and, ideally, work your way up to contributing 15% of your pay. For those covered by FERS the government matches up to 5% what you contribute so by all means contribute at least 5% of your pay otherwise you are passing on free money. Think you simply cannot afford to contribute 15%?  Every little bit counts and small changes can have a big impact.  Look for ways you can contribute more to your TSP account.  Are great way is to divert increase in pay such as a step increase, promotion or COLA.  Perhaps you eat out at restaurants less, spend less on groceries, spend less on entertainment or other expenses – you may free up some cash for your TSP that you will thank yourself for later!
3. Don’t Chase Investment Returns
   • There are 5 individual funds plus 5 Lifecycle funds in which you can invest for your TSP. It can be beneficial to change up which funds you invest in from time to time. But, understanding the market and knowing what to do and when can be confusing and something that many people simply don’t have time for.  By default, many folks simply invest in the funds that have done the best for the last month, 3 months or year.  This is chasing returns or buying high and selling low.  Successful long term investing means not allowing short-term movements in the market to put you in panic which can lead to poor decisions.  It’s wise to create a fund allocation that is appropriate for your risk tolerance and time until your plan to use the money.  You may also consider counsel from a qualified financial planner who can help you make appropriate TSP investments decision for your risk tolerance and time horizon.

There has been a lot of buzz about President Trump’s proposed fiscal 2018 budget.  The proposed budget would save the government trillions of dollars but many government programs would be impacted by the budget cuts as a result.  If you are a federal employee, the proposed budget cuts may deeply impact something very important to your financial future – the federal retirement system.  The proposed budget would cut spending on federal retirement programs by $3.3 billion over a 10 year period.

President Trump’s proposed budget would seek to cut contributions to federal employee’s retirement programs.  Though the proposed budget will not necessarily be implemented as is – congress ultimately has to vote on the budget – if you are a federal employee, it may directly impact your retirement savings.  Should President Trump’s proposed budget get enacted, it would be important to revisit your retirement plans as soon as possible and make necessary changes to give you the highest probability of meeting your goals.

There are various increases and decreases in President Trump’s budget so determining what it all means can be confusing.  For example, though President Trump proposed a pay increase, the cut to federal retirement spending.  The Washington Post elaborates on the five main takeaways for federal employees if President Trump’s budget is enacted as is:

• Increase Federal Employee Retirement System (FERS) contributions from workers by 1 percentage point each year until they equal the government’s contribution. This would take five to six years and would result in increased out-of-pocket payments of about 6 percent over that period. Out-of-pocket payments by federal law enforcement officers would increase by the same amount, but would not equal the greater contributions from law enforcement agencies.
• Base future retirement benefits on the average of the high five years of salary instead of the current high three
• Eliminate cost of living adjustments (COLA) for current and future FERS employees
• Cut the COLA for Civil Service Retirement System (CSRS) employees by 0.5 percent from what the formula would allowed
• Eliminate the special retirement supplement payments for FERS employees. The supplement approximates the value of Social Security benefits for those who retire before age 62.

If you are a FERS employee and you are contributing a significant percentage of your pay to the TSP, this information could save you hundreds, possibly thousands of dollars, in free agency match contributions.

As you may know, in 2017 the annual limit on elective deferrals (how much you can contribute in a calendar year) into the TSP is $18,000. If you reach the maximum contribution limit prior to the end of calendar year your contributions will be suspended.

You may also be aware that FERS employees can receive as much 5% of pay in TSP agency contributions which is clearly an excellent benefit. Of the 5%, 1% is what’s referred to as Agency Automatic Contribution and the remaining 4% is referred to as Agency Matching Contribution.

As indicated in the name, the 1% Agency Automatic Contribution is automatically contributed to your TSP by the government whether you contribute to the TSP or not. Conversely, the Agency Matching Contributions are contingent on your contributions. To receive the maximum Agency Match of 4% you must contribute at least 5% of your pay per pay period.

Matching Schedule

The matching schedule is as follows:

• First 3% – Dollar for Dollar
• Next 2% – 50 cents on the Dollar

What This Means to You

Here is the significance of this information and how it may apply to you. Given the information above, you can see that if your TSP contributions are suspended due to hitting the $18,000 maximum prior to year end, the 4% Agency Match will also be suspended.

Example

If you happen to be contributing more than $693 per pay period ($693 x 26 pay periods = $18,018), starting the first pay period you will be leaving free matching money on the table.

For example, using an $88,000 salary and TSP contributions of $900 per pay period this individual would hit the $18,000 limit in pay period 20. This individual would miss out on a 4% match for the remaining 6 pay periods which equals $812.30.

For higher salaries, the amount of free money that would be missed is even greater. An individual with a $150,000 salary and TSP contributions of $1,000 per pay period would hit the $18,000 limit in pay period 18. In this case, he or she would miss out on a 4% match for the remaining 8 pay periods which equals $1,846.15!

Clearly no one wants to leave free money on the table which is why we encourage FERS employees to make sure contributions are no more than $693 per pay period allowing for the maximum Agency Match Contributions to be received.

Ensure You Get the Full TSP Match

If by chance you find yourself currently contributing more than $693 per pay period, not to worry. Here is what you need to do to ensure you receive the full match.

First, determine how much you have contributed year to date (not including agency contributions). Subtract that figure from $18,000, then divide by the number of remaining pay periods. The resulting figure is the dollar amount you need to contribute per pay period through the end of the year. Finally, set a reminder to adjust your contribution prior the following year’s first pay period to $693, assuming the annual limit remains at $18,000.

What About Catch Up Contributions?

If you are wondering about catch up contributions for employees age 50 or older, they do not receive a match of any kind. Therefore, accelerating your catch up contributions to fully fund the $6,000 annual limit prior to year-end will have no negative financial implications.

Source: TSP.gov

Neal Thompson is the founder of Thompson Wealth Management. Since 2009 TWM has specialized in the retirement planning needs of the federal employee community throughout the southwest. Neal frequently presents live FERS and CSRS onsite workshops for various agencies. Reach Neal at (480) 305-2038 or via email.

© 2017 Neal Thompson. All rights reserved. This article may not be reproduced without express written consent from Neal Thompson.

The majority of federal employees will not retire with a million dollars or more in their Thrift Savings Plan (TSP). In fact, only 1% (varies based on the stock market performance) of federal employees currently have over a million dollars in their TSP.  However, in terms of retirement income there is the potential for federal employees create retirement income that would require an investment portfolio of one million dollars or greater.

For example, let’s assume an individual covered under FERS has 30 years of creditable service with a high three average salary of $90,000.  If that individual retired at 62, they would receive a gross annuity of $29,700 annually.  How big of an investment portfolio would it take to create $29,700 of investment income? Assuming a 4% withdrawal of the account value, creating an annual income of $29,700 would require an investment portfolio valued at $742,500.  Let’s then assume that this individual has accumulated $400,000 in their TSP over a 30 year career and begins taking a 4% withdrawal annually in retirement which would result in an additional $16,000.

Between the TSP and FERS annuity, this individual would be receiving $45,700 annually. How big an investment portfolio would it take to create $45,700 of investment income? It would take $1,142,500 to generate, again assuming a 4% annual withdrawal. Not bad, especially considering this does not include Social Security which can be collected as early as age 62.   Based on a salary of $90,000, the estimate for a 62 year old collecting social security is $18,840 annually. That brings total gross annual income from the TSP, FERS annuity and Social Security to $64,540. Now you may be saying, $64,540 is only 71% of a $90,000 salary but keep in mind once in retirement you no longer have the following deductions:

• TSP (hopefully 5% to 15%)
• Medicare tax (1.45%)
• Social Security tax (6.2%)
• FERS Retirement (0.8% or 1.3% for special category employees)

In my experience, the best place to start when planning for retirement income needs is to focus on your current net pay versus what your net pay will be in retirement. Salary is important for calculating the annuity and TSP contributions but in terms of retirement income planning, the key factor is what gets deposited into your checking account after taxes and deductions. Generally, if you can achieve 100% of your current employed net pay in retirement, taking a reasonable 4% or less annual withdrawal from the TSP coupled with the FERS pension and Social Security, you should feel confident that you have created a sustainable retirement income plan.

Certainly, there are several other factors and details to account for when planning for retirement such as taxes, survivor benefits, health insurance, when to start collection social security, debt, changes to expenses, etc. The goal of this article is to give a simplified, high level overview of a FERS retirement scenario and the value to the FERS retired annuitant.

I encourage all members of the federal employee community to seek out sound retirement counsel from professionals with experience working with FERS and CSRS benefits.

~Neal