When Do I Start All of This?
This seems like a simple question. But to a lot of people, it’s one of the more surprisingly confusing aspects. There is a lot to study about retirement—just understanding how expensive FEGLI gets can take up a lot of time. But before we even get to that, a lot of people just want to know, “When do I start planning for retirement?”
Some would say, “As soon as you get hired!” And there’s some truth in that. But really, do you need to know your percentages and your survivor benefit options and all of that in your 20’s? What you DO need to realize when you start working is that contributing the most you can to your TSP at that age will make your retirement infinitely more comfortable.
So what’s the real answer? When should someone start planning for retirement? Here’s my opinion:
5 years from eligibility.
Why? Well, we will get into all of that. But first let me say you don’t actually have to understand all of this FERS stuff. I have known people that just retired whenever they felt like it, never knowing the difference between waiting another year and leaving immediately. They never got an estimate. They turned their TSP faucet on, set it to automatic monthly withdrawals based on life expectancy, and just went into retirement. To this day, they still don’t understand the Supplement, why they get it, or when it ends. And they couldn’t care less. They are happy.
I don’t think this is ideal, but it certainly can be done. On the other end of the spectrum are the ultra-planners. They have their percentages calculated for every additional six months they stay on the job. They started projecting their annual leave payout 3 years in advance. TSP withdrawal strategy? That was nailed down 8 years before they’ll even be eligible to make the first withdrawal. They’ve had private life insurance for 15 years. And they will gladly warn you about the dangers of annuities.
The world is full of different personalities. I’m not taking sides. But I will say this: I have yet to see anyone regret retirement, no matter what approach they take.
Where It Starts
For most Fersonians, retirement is not their main thought for the majority of their careers. And that’s perfectly normal. But at some point something happens. They start to get interested in retirement. Generally, the first point of curiosity begins with some version of the following questions: “How much do I get when I retire?” Or even, “Can I afford to retire?” Shortly thereafter, this is followed up by someone “running the numbers” for them. This can be done by a private entity (Tammy Flanagan, Cindy Lundquist, me, and others), or it can be done by their agency. .
At this stage, the report they get back generally creates a whole series of questions they didn’t realize they had: What if I stay longer? Should I get rid of FEGLI? Is the full spousal survivor benefit worth it? Is there really a best date to retire? And away we go down the path to retirement education…
A good place to start may be the basics on FERS retirement that I wrote about HERE.
When Should It Start
I think 5 years is the ideal time to begin your education. There are a lot of good reasons for this. So let’s get into them.
Insurance. Understand that in order to be able to carry FEHB into retirement (and FEGLI for that matter, if you want to), you need to be covered for the 5 years preceding retirement. Generally this is not an issue for most employees. However, there are instances where a spouse working in the private sector has very good insurance and the FERS employee hops on theirs. If that is the case, you’ll probably want to switch to FEHB 5 years out so you can carry it into retirement (and thus allow your spouse to be eligible in the event you shuffle off this mortal coil before them). Our FEHB is a fantastic, and often underrated, benefit that we can easily take for granted. Talk to some seniors out there working to pay for insurance. It gets pricey.
FEGLI works the same. However, being the unnecessarily complicated animal it is, there are some twists to it. You can only carry into retirement the FEGLI coverage you have had over the last 5 years. What I mean by that is this—there are varying degrees of FEGLI coverage. You can’t carry into retirement MORE than you carried the 5 years preceding retirement. For example, let’s say you have Option B (that’s the optional 1 to 5 times your salary coverage) at 1 times your salary for the last 5 years. You CANNOT decide at retirement to up that to 5 times your salary. You are limited to what you’ve had for the last 5 years. You can elect to have less (or none), but you can’t elect to have more.
That being said, I would strongly encourage everyone to at least get some private life insurance quotes to see if switching from FEGLI makes financial sense. By starting this process 5 years from retirement, you have plenty of time to do this without being stressed by a pending deadline. I often get asked if I have a favorite life insurance company. I don’t recommend any. If you already have USAA, you might want to start there. I know fans of Dave Ramsey will often go with the company he recommends, Zander Insurance. There are also plenty of websites that compare quotes. Just do your homework and shop around.
TSP. I say it quite often. Your FERS annuity will make sure you’ll never be homeless or starve to death. But it’s your TSP that determines how comfortable you will be in retirement. Some of you have maxed out from day one. You passed 7 figures a long time ago. Others of you have not been as fastidious. By learning about the TSP and addressing it at least 5 years from retirement, you have some time to partially recover from any less-than-optimal decisions you might have made.
For example, let’s say you max out at $19,500 (not counting catch up) for 5 years and average a 5% return. With matching contributions, that would add an additional $150k or so to your balance. Maybe not a million bucks, but at a 4% withdrawal rate, that $150k can add an additional $6,000 annually to your income. And that will certainly help. Don’t misunderstand me here. I’m not saying you can undo an entire career of not contributing much. There is no way to recover completely from missing out on years of compounded investing. But what I am saying is that 5 years is still enough time to make a positive impact on your retirement savings. A popular adage in the financial world: “The two best days to plant a tree are 20 years ago, and today.” Don’t fall into the trap of thinking that because you didn’t save that much in the past, it’s not worth saving anything now. That’s not true. Start immediately.
5 years also gives you a chance to learn a little about the TSP, investing in general, and develop a withdrawal strategy. Ask anyone that’s retired. The easy part of the TSP is accumulating. Deciding what to do with that balance in retirement is the harder part. This takes time. For most people, it’s not as simple as retiring on Friday, coming up with a withdrawal strategy over the weekend, and pulling money out on Monday.
Debt. If I could pick just one number that predicts financial success in retirement, it would be the amount of your monthly expenses. Even more than your TSP balance. I don’t care if your High-3 was $180k, you have 40 years on, and you have $1.7m in your TSP. If you have a $400k mortgage, tons of credit card debt, and payments on a Harley, a boat, and two cars, you’re not going to be thrilled with your monthly cash-flow situation.
By getting serious about debt 5 years from retirement, you should be able to get rid of some of the consumer debt. Maybe not your mortgage, but then again, maybe. I’ve known people to get really serious about debt and knock out a tremendous amount of their mortgage in just a few years. Going into retirement with as little monthly debt as possible will make life a lot less stressful. Sit down 5 years from retirement and take a good hard, HONEST look at your finances. See where you are and where you’re going. It may be possible you need to make some tough decisions. Like selling the boat, or maybe even downsizing the house.
Again, 5 years allows you the time to do that without being under the gun. Wait until 3 months before retirement to do this, and make sure you budget for some blood pressure pills as well.
If you are really choking on debt and unsure on how to get started, Dave Ramsey is probably the best place to start. If you’re looking for advanced investing strategies, you might not find what you’re looking for. But there is no one else better out there that I am aware of to take you from negative net worth to positive net worth. His book The Total Money Makeover was influential in my life many years ago when I started getting serious about increasing my net worth each month. Eventually I ended up meeting with Dave a couple of times in his office through a good friend of mine, Tony Bradshaw, who was Dave’s VP for years. Tony does his own thing now and has a book out there that I can also recommend, The Millionaire Choice.
I’ll address TSP loans here also. For whatever reason, I have seen a lot of leave and earnings statements lately with TSP loans on them. After separation, you’ll have 90 days to pay off that TSP loan. Once that deadline passes, it will be considered a distribution from your account and taxable to you in that year as ordinary income. Let’s say you have $10,000 unpaid on your loan at retirement. Assuming you’re in the 22% federal tax bracket and a 3% state tax rate, you’ll owe a total of $2,500 in taxes ($2,200 in federal, $300 in state).
The other drawback of having an outstanding loan at retirement is that you cannot take a withdrawal from TSP until the loan is resolved. This resolution could be paying it off or having it formally declared a distribution, but until one of those things happens, you cannot make a TSP withdrawal. Something to keep in mind.
However, if you know for a fact that you aren’t going to pay the loan off, and you don’t want to wait the full 90 days for the deadline to pass, write to TSP and tell them you have no plans on paying off the loan. They’ll go ahead and lock it in as a distribution without waiting the entire period. At that point, you’ll be free to start the withdrawal process.
Cash. If you don’t know, you don’t start to get a check from OPM the week you retire. You should get a reduced check (60-70% of your full amount) a month or two into retirement, and then the full check 3-4 months (hopefully) into retirement. This can be a stressful time for those with no savings. Please build up 3-6 months of living expenses and keep that amount in a savings account. (Yes, I know you won’t be making much money on it. That’s not the point.) This is just good financial sense for anyone, but especially for soon-to-be retirees. I realize this cannot be accomplished overnight. Again, this is why you start 5 years out.
Fixing Errors. I will keep this short. I could tell horror stories of people who waited until retirement to address issues such as military buyback, or errors in their service history—like not getting credit for time at another agency. Please, please, PLEASE look at your Electronic Official Personnel Folder (eOPF). I know many people that have never even been on that. You want to verify that dates and agencies and military buyback documentation is all in there and all correct. If you need to fix something, it can take time. 5 years gives you plenty of time to fix it. Waiting a few weeks before retirement will not. Military buybacks particularly can be an issue. Employees may think they have bought their time back and sometimes they have not. Please make sure. It generally means the difference of thousands of dollars every year for the rest of your life. So it’s important.
While you’re in there, make copies of everything. You’ll lose access to this after retirement and you may need to show OPM some documentation. You can print it off if you want (it’ll probably be 3-4” thick), or you can save it to a thumb drive.
Post Retirement Work. I’ve saved this one for the last because it’s the big one. I have seen far too many people working hard, putting in the long hours every week, without a thought to themselves, and boom—they find themselves at the retirement finish line. Now they have to scramble to get a job, or maybe even decide what job they want to do. Then comes a flurry of stress and panic—How do I do a resume? How do I network? Is it worth getting that extra certification? Do I even have time to get it? Maybe I should just keep working?
I see two types of people go into post retirement work: 1.) those that can’t wait until the retirement day to get here because they have a great offer at the next company, and are excited to start, and 2.) those that aren’t sure what to do, so they scramble to get something just for now, and then will start looking for something better right away. The second group typically wishes they had more time, and they wish they had started earlier. Hence one of the main purposes of this article.
By starting 5 years from retirement, you have a world of options available to you. Most importantly, you have the ability to look at your current FERS job to see how to leverage that into a second career. And make adjustments if you need to. I’m going to give you a couple of very specific real-world success stories I am personally aware of. They are from the part of the government I know best—federal law enforcement—but the principles can be applied to any sector of FERS.
Let’s call the first employee Diane.
Diane worked for a federal law enforcement agency and was nearing retirement. She had accomplished some pretty noteworthy things in her career. However, translating those achievements into something marketable to the private sector would be a challenge. Diane looked around at what her options were and how to leverage her current job into a successful and lucrative post-retirement job. She convinced her agency to send her to polygraph school. A very expensive proposition. However, this was not a complete boondoggle—her agency used polygraphers from the private sector, and now would be able to use her in-house, so it was of mutual benefit. But, once retirement arrived, Diane left, formed her own polygraph company, and became very successful in the private sector, with a skill and experience that isn’t easily replicated by someone just trying to break into the industry.
Jack’s story is similar. He worked for a federal law enforcement agency that did a lot of crime enforcement-drugs, guns, etc. Jack saw retirement looming a few years off and decided to improve his marketability. His agency had various schools and certifications that could be obtained related to arson investigations. These are difficult certifications to get. They take time. They require a lot of work. And what’s more, they require a lot of extra duty, such as extra callouts—weekends, nights—that sort of thing. This came at a time in his career when a lot of other employees were winding down. So it took some extra motivation and vision for the future. But it paid off. Jack retired into a private business that assists insurance companies with fire investigations. It is lucrative, in demand, and an exciting second career.
In both of these cases, had the employees simply continued on in day to day work, they would have reached retirement without a definite plan. Yes, they had a lot of experience to draw from, but without someone showing them how to leverage that experience, who knows where they would have ended up? They certainly wouldn’t be working for themselves in these two professions because they wouldn’t have gotten those certifications. Get in the driver’s seat. No one’s just going to fall out of the sky and offer you a wonderful job, because they probably don’t know you exist. Which brings me to my next point.
Something not to gloss over is that while they were getting the new certifications, they were making new contacts in their fields. I imagine these are two very niche industries and it probably helps tremendously to make these type of contacts and start developing a reputation for yourself. It’s still true that who you know is as important as what you know.
What is your niche? What can you find in your agency to help propel you into not just a job, but a career?
As evidenced by the coins I get from all corners of the government, there is a whole universe of agencies I don’t know a lot about. But I do know that you all possess very unique skills, and you’ve spent a couple of decades developing those skills. Maybe you don’t need an additional certification. Maybe you need to get an additional degree—like a Master’s, or even a PhD to teach. I’ve known FERS employees to get both. I got my Master’s in Accounting at age 43 in preparation for retirement. 5 years allows some time to get these sort of things accomplished. I would encourage you to look around and see what skills or certifications your agency can provide you that would be beneficial in retirement. And what additional education may be of value.
6b. Putting it together. Warren Buffett and I agree on a lot of things—although he doesn’t have any idea. One of the things we agree on is the best investment you can make is an investment in yourself. Do not be cheap when it comes to what you are putting into yourself to make you better, more knowledgeable, more marketable, etc.
If you aren’t experienced with creating a resume out of your career achievements, don’t hesitate to pay someone. The fact that you were an extremely successful agent that made lots of drug busts may be impressive, but not necessarily marketable. Potential employers are much more interested in how you led teams, managed budgets, worked with others, etc.
There are specialists out there that are experts in converting your government service into what private companies are looking for. Al Malinchak is one of those experts. A retired FBI agent that has done this sort of thing for years. I know of Fersonians who were very impressed (and thankful!) that they reached out to him for guidance, obtaining jobs quicker and more lucrative than they had expected.
The other way to invest in yourself is through time. Your last few years, please allow yourself some time to work on your retirement. A few hours a week is not unreasonable. I’m not telling you to become a slug at work and risk bad performance reviews. But I am telling you that this job will end one day. For some of you it will end sooner rather than later. Plan accordingly and retirement will be a happy time, not full of stress and uncertainty.
Now, some of you don’t plan on working at all. Or if you are going to work, you won’t be looking for a second career; you’ll be happy working the paint aisle at Lowe’s. And there is not a thing in the world wrong with that. But for those looking to retire at first eligibility and move into a job that provides a significant net raise when combined with your annuity, it can prove very beneficial (and lucrative) to start the process now.