Benefits Decisions at RetirementFederal Employees
The final step toward retirement in the workplace is filling out retirement paperwork. That paperwork contains a few very important decisions for federal employees. These decisions can have a profound impact on the rest of your retirement, so it’s important to make a wise decision.
What day should you retire?
This doesn’t sound very important but could easily make a difference of three to four thousand dollars. Most FERS employees are going to want to retire on the last day of the month. The reasoning behind retiring on the last day of the month, is so that you don’t miss out on any income. Retiring on the last day of the month allows you to collect your salary for the whole month and then your FERS annuity starts accruing the next day. If a FERS employee were to retire on the 15th of the month, they would only get paid their salary until the 15th and then would have 15 days until the end of the month without any pay.
The time of the year is not very important unless the future retiree is looking to maximize their annual leave payout. Retiring at the end of the year would allow the retiree to get the highest annual leave payout at retirement. That way the employee can carry over their 240 hours and then accumulate 208 hours throughout the year. This would allow a retiring federal employee the maximum (with the exception of a couple subsets of employees who can carry over more hours) annual leave payout. One great thing about annual leave checks is that they do get paid in the month following the month you retire, so an employee retiring at the end of the year would receive a check in January.
Federal Employee Group Life Insurance (FEGLI) is another decision that needs to be made at retirement. If you are carrying options A, B or C at retirement and have had them for at least five years, then you can opt to keep them in retirement. However, the premiums will continue to increase.The premiums on the options increase every five years. They increase at age 55, 60, 65, and continue to increase until the premium ends up being unsustainable for most retirees. Due to the escalating premiums, most people choose to drop their options B and C at retirement.
Option A and basic insurance operate a little differently. You can elect to keep your option A which is $10,000, and pay the scheduled premiums until age 65 or retirement, whichever is later, and at that point you don’t pay any more premiums and your coverage slowly gets reduced down to $2500.
Basic insurance operates similar to Option A at retirement. If you elect to have your coverage reduced by 75%, then your premiums stay the same until age 65 or retirement, whichever is later, and your coverage gets reduced by 2% a month until it reaches 25%.
For example, if you were to retire at the age of 60, you will continue to pay premiums until age 65 at which point premiums will cease. Then your coverage will start to be reduced by 2% a month. If you had $100,000 of coverage, your coverage will start to be reduced at the age of 65 by 2% per month until it eventually reaches $25,000. You will have that $25,000 of coverage for the rest of your life.
The decision of whether to keep FEGLI is one that should be carefully evaluated. If you will still need life insurance in retirement, then it would be best to carefully evaluate what your premiums would be through FEGLI versus getting your own policy. If your health is subpar at retirement, then it may be a great idea to keep your Basic FEGLI at 100%. This becomes more of a wise financial decision versus a survivor needs decision.
An example would be if you have had a heart attack or you currently have cancer in advanced stages, or if you have become an insulin dependent diabetic and your lifespan has been shortened in any way. In these cases it may be a very wise financial decision for your family to keep FEGLI at 100% due to the return that you would get on the investment.
Survivor Annuity choices
Survivor annuity options are another decision that needs to be made on your retirement paperwork, and this is arguably the most important. When a FERS employee retires, they have three options when it comes to the survivor annuity.
The first option is to elect no survivor annuity. If you choose this option, then at your death, the only benefit that your spouse would be entitled to is any uncollected premiums you paid in to your FERS annuity. Most FERS employees pay very little towards their FERS annuity, so the amount a beneficiary would receive would likely be under $20,000 in the first year and down to no benefit after six months.
The full survivor option would leave your survivor a 50% survivor annuity. The Federal retiree takes a 10% reduction in their survivor annuity to guarantee that at their death, their spouse would receive 50% of their FERS annuity.
The third option is to elect a partial survivor annuity. The federal retiree takes a 5% reduction in their FERS annuity in this scenario to guarantee that their spouse would receive a 25% benefit at their death.
Either of the survivor annuity options will allow the Federal retiree spouse to continue the retiree’s Federal Employee Health Benefits (FEHB). If you do not elect a survivor annuity, then your spouse cannot continue your FEHB after your death.
Does the survivor annuity sound a lot like life insurance? It should because it provides a benefit at the federal employee’s death. Should you get your own life insurance instead? Maybe and maybe not. There are important differences between the survivor annuity and life insurance, the biggest being that if you don’t take at least a partial survivor annuity then your spouse cannot continue your FEHB after your death.
Thrift Savings Plan (TSP) decisions at retirement: Federal employees do not have to make an immediate decision on what to do with their TSP at retirement. In fact, you have to wait 30 days after your retirement to do anything with your TSP. The three options that you have with your TSP are elect an immediate annuity, transfer money to an IRA, or keep money in TSP. Each of these three options has its benefits and drawbacks, and I would recommend that you spend some time evaluating which of the three options is best for you. There is way too much information to digest in regard to this decision, so it will have to wait for another day.
Know your options
Preparation can help you make the right decisions at retirement. If you would like some help with your retirement decisions and/or retirement planning in general you are welcome to schedule a call with Brad.
Brad Bobb, CFP® is the owner of Bobb Financial Inc, and an expert in retirement planning for federal employees.