Midcareer Considerations

Hundreds of thousands of federal employees are within striking distance of retirement eligibility, but many more who are further than 10 years away. This is when midcareer planning begins. One loyal reader of this column, Brenda, recently sent me an e-mail with some specific questions about her midcareer planning. Here's what she wrote:

I am currently 44 years old with 20 years of service and will most likely spend my career in the GS-7 salary range ($40,000-$58,000). I have 12 years until I am eligible for retirement. At that time I will be 56 years old (my minimum retirement age under the Federal Employees Retirement System) and I will have 32 years of service. I have been able to contribute 7 percent to 10 percent of salary through the years to my Thrift Savings Plan and I also make contributions to a Roth IRA.

Brenda then posed a series of questions. I'll take them in order.

Should I retire when I am eligible at 56?

I don't know if you will be able to afford to retire or not, but I will tell you that based on what you are currently doing, it sounds like it may be possible to plan for that scenario. You will have a FERS basic retirement benefit that will replace 32 percent of your high-three average salary. Keep in mind that your basic benefit does not receive a cost of living adjustment until you're 62 (although there is an exception to this for special groups such as law enforcement officers and disability annuitants). If inflation is high when you plan to retire, you may want to consider supplementing your retirement income with a few extra years on the job, or a second career.

On the other hand, you'll be eligible for a FERS supplement, since you'll be retiring before you are qualified for Social Security with an unreduced and immediate FERS benefit. The supplement will end at 62, or when your earnings exceed more than an annual allowable amount. This will provide income equal to about three-fourths of the Social Security benefit you'll be eligible for at 62. An easy way to estimate the supplement is to divide your years of civilian service under FERS by 40 and multiply that by your Social Security benefit payable at 62. For you, that would be 32/40 of your age 62 benefit.

The amount of Social Security benefit you will receive is influenced by a number of factors. These include whether you apply at 62, or wait until you are closer to your full retirement age. The number of years worked and the amount of your wages also is a big determining factor. At your income range, Social Security should replace 40 percent to 50 percent of your income if you retire at your full Social Security age -- which is 65 to 67, depending on your year of birth. Here is a link to an online calculator you can use to compute your benefit at 62.

The biggest factors in determining whether you'll be able to afford to retire at 56 are:

• How well have you managed your TSP account and other investments? If you plan to begin using your investment income in 2021, you should probably be invested in the life-cycle L2020 Fund, or a similar mix of investments.
• How well will the stock market recover by then? This is the big unknown. The stock market may begin to recover this year, but that all depends on how much confidence investors have.
• What will your expenses be when you're 56? Will you have children in college? Will your mortgage be paid off? If you are living on only 70 percent to 80 percent of your income by then, you probably will be able to afford to retire. Keep in mind, after you retire, you no longer pay TSP, FERS retirement, or Social Security taxes. You also will have less income subject to income taxes.
• If your retirement benefit and savings are not enough, would you consider working part time for a few years?

If I am reemployed after retirement, would there be salary restrictions?

You will be entitled to receive the FERS basic retirement benefit regardless of how much money you earn after you retire. The FERS supplement and Social Security benefits are earnings-tested until you reach the full Social Security retirement age. If you continue working after retirement, you probably will postpone making withdrawals from your TSP account until you are fully retired, although there are not any earnings restrictions on TSP withdrawals.

Should I be contributing more to my Roth IRA?

The advantage of a Roth IRA is you don't have to pay taxes on withdrawals. In addition, there are no required withdrawals from a Roth, as there are from the TSP and other traditional IRAs. The drawback to a Roth is you have to contribute dollars that already have been taxed, which might mean you won't be able to contribute as much as you could if you put pre-tax dollars into your TSP. There also are income limits that restrict who may make Roth IRA contributions. You may want to review IRS Publication 590 for more information.

What are the advantages to staying with government instead of retiring when eligible?

If you like your job and salary, then the longer you stay employed in federal service, the more generous your retirement will be. Every day that you work, your high-three average salary goes up and every month of additional service increases the length of service used to compute your retirement. In addition, continuing to work allows you to contribute more to your TSP account and gives you less time to spend it. Working longer also results in a higher Social Security retirement benefit.

The other side of the coin is the longer you continue working, the less time you will be retired. If you choose to retire and go back to work outside of federal service, you will have to evaluate the retirement and savings plans your next employer offers. It is going to come down to financial planning and also thinking about what you want to do with the next phase of your life.

Check with your agency to see if it offers midcareer planning seminars. These usually include a financial planning component and a benefits overview. Later on, when you are about five years from retirement eligibility, you may want to attend a pre-retirement seminar to review the benefits and financial planning, and get information on the transition to your life after retirement.

Here are some of my previous columns addressing retirement eligibility, computation of benefits and the FERS supplement:

• Eligibility: Facts and Myths July 6, 2007
• Deferred vs. Postponed June 29, 2007
• Retirement Estimate: The Details May 11, 2007
• Basic Retirement Computations May 4, 2007
• Estimating Your Benefits April 27, 2007
• Supplementary Information Feb. 2, 2007
• Supplementing FERS Jan. 26, 2007

The office of Personnel Management also has a wealth of information on its Web site for employees who want to start planning for the future.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.