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What Federal Employees Need to Consider in Case of 'Forced' Early Retirement
One of the casualties of this month's government shutdown and the furloughing of
many federal employees has been the Thrift Savings Plan (TSP). During a furlough
period, an employee is not paid and cannot contribute to the TSP. For
FERS-covered employees, this means during the furlough period their TSP accounts
will not receive both the automatic one percent of gross pay contribution and
the agency matching contributions. In addition, undoubtedly there are some TSP
participants who are taking out TSP loans in order to pay their weekly bills,
thereby removing funds from the TSP account even though those employees will
eventually pay back their TSP accounts (with interest).
The current government shutdown should be a "wake up" call to all employees
regarding their future federal service and their ability to contribute the
maximum possible to their TSP accounts. Once the current funding problems are
resolved, most federal agencies will likely face reduced funding. As a result,
there may be early retirement offers to eligible employees in the form of a
Voluntary Early Retirement Authority (VERA) (no "buyout") and a Voluntary
Incentive Separation Payment (with a "buyout"). Some employees may feel so
discouraged with the political climate in Washington that they will leave
federal service before their eligibility retirement date and opt for a deferred
retirement, receiving their CSRS or FERS annuity at a later age.
Federal employees facing early or deferred retirement are not alone. Many
retirees in private industry have left their jobs before they were expected to
and often not by choice. According to retirement-industry research firm LIMRA in
Windsor, CT, almost half of the 1,533 retirees surveyed in 2012 had retired
earlier than expected. Some of the reasons for retiring early before their
normal retirement date include: (1) health reasons (17 percent surveyed); (2)
being laid off or a buyout (14 percent surveyed); and (3) negative working
conditions (7 percent surveyed).
Finding a new job after leaving or retiring from a job earlier than expected
can be a challenge. LIMRA found that two-thirds of workers plan to work part
time and 6 percent full time after they retire from their primary careers. But
only half the retirees who expected to work actually found employment.
One problem associated with an employee's early retirement is that the
employee could be forced into tapping their retirement savings earlier than
expected into in order to pay their bills. For federal employees who leave or
retire early and are unable to find gainful employment, this could lead to
forced withdrawals from their TSP accounts. Retiring earlier and no longer being
able to contribute to the TSP and withdrawing from one's TSP account earlier
than expected means less probability that one's TSP account could last for a 30
or more year retirement.
The following are some recommendations for federal employees to minimize the
cracks to their TSP retirement nest egg when an early retirement or forced
departure comes as an unwelcomed surprise:
• If possible, delay TSP withdrawals. When an employee is
forced to abruptly quit federal service, the individual usually winds up with
smaller than expected TSP savings. These reduced savings must last a longer
amount of time than originally planned since the individual left or retired from
federal service earlier than expected. If possible, the individual should delay
tapping their TSP account, even if it means taking on part-time employment .
Another remedy is drastically cutting back on personal expenses. The thinking
behind the former strategy is that even if a reduced paycheck will not keep the
former employee on the same TSP savings track, a paycheck might allow the TSP
account owner to be better able to preserve in the TSP what has been previously
• Replace tapped TSP savings. If a departed or retired
employee is forced to dip into TSP savings prematurely, then the individual
should do whatever it takes to replace the withdrawn savings. For example, if
the individual is fortunate enough to find another job that offers a qualified
retirement plan such as a 401(k) plan, then participation in such a plan is a
must. Under TSP rules, a departed or retired TSP account owner is allowed to
transfer into their TSP account funds from a 401(k), 403(b), 457 retirement
plan, and from a SEP-IRA or SIMPLE retirement plan. There is no dollar limit as
to what can be transferred into the TSP.
If the individual does not have access to a retirement plan but has
some earned income, or if the individual is married and the spouse has
some earned income, then the individual and their spouse are eligible and each
should contribute to some type of IRA. Contributing the maximum possible to a
retirement plan and/or IRA is extremely important in order to make up for any
lost savings or missed opportunities to contribute to the TSP.
• Think carefully before claiming Social Security benefits.
Those departed employees who are at least age 62 and who are not working might
consider Social Security as an easy income source to tap. Before claiming their
Social Security retirement benefits, they should consider what they are giving
up, namely, for every month they wait to start drawing their Social Security
benefits (until age 70), the larger their monthly benefit. In fact, Social
Security benefits increase 8 percent every year that the retirement benefits are
delayed between full retirement age and age 70. The effect of delaying the start
of one's Social Security benefits past full retirement age is explained and may
be calculated at http://www.ssa.gov/pubs/ageincrease.htm.
If there is a need for income between ages 62 and 66, then it may make more
financial sense to withdraw one's TSP account earlier and delay taking Social
Security until later. The reason: Delaying Social Security retirement benefits
results in a guaranteed increase of monthly benefits, whereas there is no
guarantee that one's TSP account or other retirement will increase in value.
Another consideration for Social Security is that by working after age 62,
the youngest age at which an individual can claim Social Security retirement
benefits, an individual could raise one's Social Security retirement benefit by
improving their lifetime earnings on which they are based.
• If necessary, move to a less expensive area of the
country. Those departed or retired employees who worked and live in a
more expensive area of the country such as Washington, DC, New York or
California, may want to consider moving to a less expensive area of the country
such as the southwest, southeast or the Midwest.
About the Author
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Financial
Consultant, Chartered Life Underwriter, Registered Health Underwriter,
Registered Employee Benefits Consultant and Enrolled Agent in Silver Spring, MD
-- and the owner of EZ Accounting and Financial Services, an accounting,
tax preparation and financial planning firm also located in Silver Spring,
MD. Zurndorfer is also is an instructor at federal employee
retirement seminars throughout the country and writes numerous columns and books
on federal employee benefits.