Many federal employees are in the fortunate position of having the option of moving to a contract position at retirement, or even before they plan to retire. This can happen with specialties that fall under the normal FERS retirement system, but most commonly this happens with law enforcement officers (LEO) and air traffic controllers (ATC). When the offer comes around for the contract position, is it wise to retire and leave the government?
There are obviously a number of factors to consider when making a decision like this. From my experience, there are three categories to consider:
- Retirement eligibility
Are you eligible for Retirement?
This is one of the most important factors in your decision. Retiring from the government is very important because of the retirement benefits. Retiring employees get to continue their FEHB, FEGLI and receive their FERS Annuity and FERS Supplement. Having these benefits gives you the flexibility to look at job offers that don’t have benefits, or possibly even less pay.
Federal employment is known for it’s strong benefits, but they’re even better for LEO, ATC and a few others that fall under the 6c coverage. These employees can retire at any age with 25 years in, or at age 50 with 20 years or more of employment.
If you are eligible for an immediate federal retirement then you are in a good position to listen to contract offers.
This is the easiest part of the decision. Depending on the salary and benefits with the contract offer, it could be a good deal, but you also have to factor in your federal retirement. It’s also important to note that there should be two aspects of the financial part – current income and retirement income.
What will your current income be from the new job plus your FERS Annuity and FERS Supplement? Does the new job have a 401k with matching or profit sharing? Don’t forget that your Supplement will be earnings tested once you reach Minimum Retirement Age (MRA).
Once you figure out which position offers the best current income, you can move on to retirement income. What will your retirement income be if you stay at your federal job versus leaving for a contract position? By continuing your federal job, you will increase your FERS annuity by 1% of your high 3 for each year worked. You also receive a 5% contribution to your TSP as long as you contribute 5%.
Here is a hypothetical example of Joe Fed.
Joe’s federal salary is $150,000 and he is considering retiring at the age of 52 with 25 years as a Law Enforcement Officer. If we assume his high 3 is the same as his salary, his FERS Annuity is $58,500. His FERS Supplement is $14,400 a year. His 5% matching in TSP equals $7,500.
Delaying retirement until age 57 would increase Joe’s FERS Annuity to $66,000 and the Supplement to approximately $18,000.
The contract job offer includes a $125,000 salary with a 3% match in a 401k. In this scenario, Joe’s total income over the next five years would be:
- Salary = $125,000
- FERS = $58,500
- Supplement = $14,400
- 3% 401k match = $3,750
- Total = $201,650
The current federal salary is really simple – add the salary plus the 5% matching in TSP.
$150,000 + 5%($150,000) = $157,500
The contract job along with federal retirement benefits is obviously going to produce the most current revenue, but what about in retirement? One of the easiest ways to compare is to look at the following table and compare the data.
POST AGE 62
POST AGE 62
POST AGE 62
POST AGE 62
The difference in current compensation is $44,150. The only fair way to compare the two is if the retiree were to invest the difference over the next five years. If the effective tax rate were 12% then the amount invested per year would be $38,852, for a total of $194,260. If the retiree could get an average return of 5% per year then the total would be $220,181 at the end of five years.
The financial difference of taking the contract job is that the retiree would have approximately $220,181 more in investment savings vs. a FERS Annuity that is $7,500 higher a year. The retiree would also have a higher supplement if he stays with the government, but that only lasts until age 62.
Would you rather have an extra $220,000 or a FERS annuity that is $7,500 higher a year? If you were to take an annual income of 5% from the 220k, it would produce an income of $11,000 a year.
In this scenario, I would say that the contract position would be better financially, but there isn’t a huge difference. When the contract job pays the same salary, or a higher one, it’s probably going to come out on top.
One more thing to consider when looking at the financial aspect is job security. Job security working for the federal government is really good, but what is the security of the contract position? This will vary significantly depending on the job and area. I know a retiree that retired from a job in a small market to pursue a contract position that unexpectedly lasted six months. The company she was working for lost their contract due to being outbid by another company.
Again, she was in a small market. Scenarios like this aren’t uncommon with government contracting positions, however, if you are in a larger market, there are a lot more opportunities. If you were to lose a position, there is a much higher chance you could find a job with another company.
Perhaps the most important question when considering a contract position is whether or not you want to work for another company. Some feds love their job and are content staying with the federal government until they are ready to retire. Others become burnt out and can’t wait to start something new, yet others enjoy their federal job, but may be ready to start something new.
If the financial side of the new job is close to being even and the stability is good, then I would recommend doing what makes you happy. It is awfully hard to put a price on happiness and a job that you look enjoy. It positively impacts your mental health as well as everyone that you come in contact with.
Before making a decision to leave the federal workforce, please answer this question – if my contract job fails, can I live on my federal retirement income? And if not, can I easily find another job?
If you can’t live on your current retirement income, then make sure that you have the skills and/or are in a position of high need for federal contractors and can find a job with a comparable income if the current position doesn’t work out.
Deciding whether or not to leave the federal workforce is an important decision. We help our clients through decisions like these to help ensure a fulfilling retirement. If you want a partner to help you make decisions like these, you are welcome to schedule an initial consultation with Brad.
Brad Bobb, CFP® is the owner of Bobb Financial Inc, and an expert in retirement planning for federal employees.