4 Critical Federal Retirement Decisions

One of the things I love about providing retirement counseling for federal employees is when I’m able to intervene during the planning process to help someone avoid a costly mistake. Retirement planning is a series of decisions. Some have minor consequences and some can have a lifelong impact on your financial security.

Here are a few examples of critical retirement decisions that can lead to very different outcomes:

No. 1: Moving Your TSP to the G Fund

Over the years I’ve seen Thrift Savings Plan accounts invested 100% in the G Fund to 100% in the C Fund and everything in between. I’ve heard the rationale from employees nearing retirement that they moved everything to the G Fund because they wouldn’t be able to retire if their investment had a major loss.

But how do you know exactly when to move out of the stock market completely? If you need guidance on how to manage your retirement savings, it is important to get help before making a decision you might live to regret.

There are several things you can do to avoid making a mistake:

• Get educated: Read, attend training sessions, and spend time learning to understand the risk, volatility and options you have to choose from when saving for retirement. Check out the variety of training sessions available at the TSP’s Training Resources page.
• Consider the L Funds as a way to create an investment strategy. The L Funds use a professionally determined investment mix designed to deliver a balanced approach to investing based on when you’ll need your money.
• It’s important to consider how your emotions affect your investment decisions—specifically fear and greed. Fear that the market may fall can lead to panic and poor choices. A stretch of continued positive returns can lead to greed and excitement, which may in turn lead to thinking that the market will continue to go ever higher without a correction.
• If you need help, consider engaging with a financial professional who can provide a reality and sanity check and get you to think about your goals for retirement. Investor.gov, sponsored by the Securities and Exchange Commission, can help you make sound investment decisions. 

No. 2: Choosing to Forego a Survivor Election

Actually, this isn’t even your decision. If you’re married and under the Federal Employees Retirement System, your spouse has a right to a survivor benefit. That means your FERS retirement benefit will be subject to a 10% percent reduction so that if you die before your spouse, they will receive a lifetime stream of income equal to 50 percent of your unreduced benefit. If your spouse dies first, your retirement can be restored to the unreduced amount. 

Be very wary of anyone who tells you to replace the survivor election with insurance. Do you really know how much insurance it will take to replace your retirement benefit? To compute the amount, you need to know how much inflation will play a role in the future of your income needs, how long you will live and how long your spouse might outlive you. These aren’t easy figures to estimate.

The most important questions about the survivor benefit election are:

• Does my spouse depend on me for health insurance? The survivor benefit allows the spouse to continue coverage under the Federal Employees Health Benefits Program.
• How important is the survivor benefit to my spouse’s financial security if I die first? Would they be able to maintain their lifestyle if my retirement benefit were to suddenly stop and one of our Social Security benefits also were to end?

No. 3: Underestimating or Overestimating the Value of FEGLI

The biggest need for life insurance is when there is an untimely death. Most people consider increasing their life insurance when they get married, buy a house, or start a family. It is not uncommon for a young federal worker with a family to have Basic Federal Employees Group Life Insurance with Option A ($10,000 additional), Option B (up to five multiples of your basic pay) and Option C (up to $25,000 of coverage on the spouse and up to $12,500 on each dependent child). The need for this much life insurance may go down when the kids are grown and the house is paid down.

In addition, life insurance becomes more expensive to obtain and maintain as you get older. At retirement, federal employees are required to consider how much FEGLI they want to carry into retirement and how much they want to maintain past 65. Common mistakes I’ve seen when it comes to that decision include:

• Continuing Option B after it has served its purpose—to protect your family in the event of your untimely death. Suppose you’re now 60 with grandchildren and a paid-up mortgage. Do you still need to maintain the same amount of insurance? 
• Not considering the value of Basic FEGLI. It’s generally worth keeping, regardless of your need for other life insurance. It doesn't cost that much, and every time you get a pay increase, your basic life insurance increases. In retirement, you can choose a 75 percent reduction for Basic FEGLI. That allows you to maintain the pre-retirement value of your basic coverage to age 65. Then the coverage reduces by 2% per month until it reduces by 75%, leaving you with 25% of the original coverage.

No. 4: Taking a Short-Term Outlook on Medicare

Your federal health insurance will continue to cover you for the rest of your life without adding Medicare Part B and paying the additional Part B premium. If your FEHBP coverage has served you well throughout your federal career, why wouldn’t it be enough to see you through your life after retirement?

Well, here are a few things to consider:

• The FEHBP plan you have now may not be the most advantageous choice once Medicare Part B becomes the primary payer of your outpatient medical expenses.
• Many FEHBP plans waive their own deductibles, copays and coinsurance when Medicare becomes the primary payer.
• Some FEHBP plans provide a health fund or Medicare reimbursement to cover some of the Medicare Part B premium.
• Medicare caters to the needs of the elderly and can provide additional benefits beyond your FEHBP coverage for durable medical equipment, treatment for chronic conditions, home health care during recovery from an illness or injury, and more.