What Federal Employees Need to Consider in Case of 'Forced' Early Retirement
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 saved.
• 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.