Are You Mentally Prepared for Retirement?

It is important to visualize a life after your federal career has ended. Some people may want to ease into retirement. Congress created a phased retirement option in 2012. Not all federal employees are eligible for it, but some agencies have implemented the option for those who are. Assuming your agency offers it, you also must be currently eligible to retire with 30 years of service at your CSRS or FERS retirement age or be at least age 60 with 20 or more years of service. You must also be working full time and not be subject to mandatory retirement.  

Under phased retirement, your work schedule changes from fulltime to part time (20 hours per week) and your retirement is paid at one-half the full amount. There is a mentoring requirement as well. Eligible employees may spend a few months up to several years in a period of phased retirement prior to fully retiring. If you are interested, check with your supervisor or a retirement specialist in your human resources office.   

Another way to mentally prepare for full retirement is to stagger your retirement benefits. For example, in our family, my husband retired from his 26-year career in federal law enforcement under the old retirement system and then finished his career by completing an eight-year second career. He is currently age 60 and receiving his federal retirement benefit while delaying his Social Security and TSP withdrawals. My retirement will include Social Security retirement and income from my retirement savings. I will be 60 on my next birthday and plan to ease into retirement by slowing down my work schedule, which is a little easier since I am self employed.  I will most likely work a few more years, at least. I plan to delay withdrawing from my retirement savings until I completely retire. In addition, there will be a significant increase in my monthly Social Security if I delay application to my full retirement age, and for every year after that I will earn an 8 percent per year delayed retirement credit.

When easing into your life after retirement it is important to stay focused on your retirement goals. Plan for the best, but prepare for the worst. Our decisions are subject to change based on our future health and other unforeseen events.  

I meet many federal employees who are eligible to retire and who are most likely financially ready to retire, but they are still having fun working. For example, I met a 66-year-old man last week who had 43 years of federal service and over a year’s worth of unused sick leave hours.  (One year of sick leave credit is worth 2,087 hours—he had over 2,500 hours!) He was covered under the CSRS retirement system, which means his retirement is limited to 80 percent of his high-three average salary plus the credit for his unused sick leave. He also saves 5 percent of his salary, currently $4,000 per year in the TSP and has been doing this since 1987.  His salary is around $80,000, but after deductions, his annual net take-home pay is around $41,000.    

At retirement, his CSRS retirement benefit will be computed at over 82 percent of his high-three average salary (his high-three average is currently about $77,000). His unreduced retirement is currently valued at around $64,000 per year. After a reduction of approximately $6,100 for spousal survivor annuity, his retirement will be reduced to around $58,000 (I am rounding these numbers to make this an easier illustration). He will need to pay for his health insurance ($350 per month), Medicare Part B premiums (for him and his wife at $134 per month each), and federal income tax (his state doesn’t tax federal retirement income). After withholdings for insurance and taxes, he will have around $42,000 left for his retirement living expenses.

He will also be paid for his excess retirement contributions once the Office of Personnel Management computes the point in his career where his service allowed him to achieve the maximum 80 percent computation, which is generally around 41 years and 11 months of service. He will receive a refund of more than a year of seven percent CSRS retirement deductions along with some accrued interest when his retirement claim is finalized by OPM. He will also be paid a lump sum for the balance of his unused (accumulated and accrued) annual leave by his agency payroll office after he retires. As long as he doesn’t have too much debt and he continues to live within his means, his CSRS retirement benefit will provide income for the rest of his life with annual adjustments for cost of living.

If he predeceases his wife, she will receive 55 percent of his unreduced (55 percent of $64,000 = $35,200) CSRS benefit and she will be able to reduce her health insurance to self only coverage and will only have to pay her own Medicare Part B premium. After taxes and insurance, she will have less income than they had while they were both alive, so she may also need additional income from retirement savings, life insurance proceeds, or her own Social Security or retirement benefits.

Under FERS, the good news is that there is no maximum FERS benefit established by federal law. The longer you work, the more generous your FERS retirement benefit will be. In addition, your Social Security retirement benefit increases for every month that you delay your Social Security benefit from age 62 to age 70. If you continue to save and invest your TSP savings, this account will also continue to earn value for your future retirement.

The bad news is, for younger retirees, there is no cost of living adjustment payable for most until age 62. There is an exception for law enforcement officers, firefighters and air traffic controllers, as well as for disability retirees and survivor annuitants. The other bad news is that for the FERS basic retirement benefit to equal 80 percent of your high-three average salary, it would take close to 80 years of service to be able to achieve 80 percent by multiplying your high-three average salary by 1 percent (or a little over 72 years using the 1.1 percent formula when an employee retires under FERS at age 62 or later with at least 20 years of service).  

You might wonder how many federal employees work more than 70 years? According to recent Office of Personnel Management Enterprise Human Resources Integration (EHRI) statistics, there are currently six. Most recently, Sarkis Tatigian celebrated 75 years of federal service working for the Navy at the Washington Navy Yard. He has no plans to retire anytime soon.  

This simple exercise of comparing your net income while working to your net income when retired can be accomplished by gathering a few documents and getting out a calculator.  You will need a recent leave and earnings statement, a CSRS or FERS retirement estimate (that includes reductions for survivor elections, former spouse benefits, etc.), your latest Social Security statement (allow for federal tax, state tax where applicable, and Medicare Part B premiums), and your latest TSP participant statement. To compute monthly income from your TSP, you can use the TSP Retirement income calculator. Doing the necessary income tax planning might require assistance from your tax preparer or your accountant. If you do your own taxes, you might try to run a “dummy” tax return using last year’s tax preparation software and substitute your retirement income estimates for your salary.   

If you can estimate all of your potential retirement income and compare the net amount to your current net income, you have taken an important step towards planning for your financial future.