5-10 Years Prior to Federal Retirement
The last five to 10 years of a federal employee’s service represents a critical period if the employee intends to retire at the time he or she wants and with sufficient pension income and benefits that will last throughout the employee’s retirement years. This is the first of two columns discussing financial and federal retirement planning issues that employees should consider within the last 10 years of the federal employee’s service. The items presented represent a checklist for soon-to-be retirees.
1. Check Form SF 50 for accuracy
One the most important forms that every employee needs to check for accuracy is Form SF 50 (Notice of Personnel Action). In particular, an employee needs to check box 30 (“retirement plan”) and box 31 (“service computation date”).
With respect to box 30, the following chart summarizes the codes that the Office of Personnel Management (OPM) uses to specify which federal retirement system an employee is supposed to be covered by. If an employee determines that he or she is assigned to the wrong retirement plan as shown by the code in box 30, then the employee needs to immediately contact his or her Personnel Office and find out why the wrong code has been placed in box 30.
1Permanent employees hired before 1/1/1984.
2CSRS employees with at least five years of service as of 12/31/1986, who left federal service for at least one year after 12/31/1983, and who returned to Federal service.
3Permanent employees hired after 12/31/1983 and before 1/1/2013.
4 Permanent employees first hired after 12/31/2012 and before 1/1/2014, or rehired employees between 12/31/2012 and 1/1/2014 with less than five years of Federal service prior to 1/1/2013.
5Permanent employees first hired after 12/31/2013, or rehired employees after 12/31/2013 and with less than five years of Federal service prior to 1/1/2014
The service computation date (SCD) in box 31 is used to determine annual leave accrual rates for full time employees. Another SCD – the SCD for retirement (frequently, but not always, the same date as the SCD for leave purposes) – determines the number of years the employee needs to be able to retire at a specified age and the number of years used in the computation of the employee’s CSRS or FERS annuity. Employees can find out their SCD for retirement by contacting either their Personnel Office or OPM’s federal retirement office.
An important reason for checking the SCD for retirement is for confirmation of deposits. Those employees who have made deposits for temporary or seasonal (“non-deduction”) service and/or military service should make sure that they have received full credit for the years covering their deposit. A full deposit for temporary or military service is reflected in an employee’s SCD for retirement which should be adjusted backward in time to include the years covering the deposit.
If an employee owes a redeposit for the CSRS or FERS contributions that the employee withdrew when he or she previously left Federal service, then the employee’s SCD for retirement will be adjusted forward in time. The employee is encouraged to make a redeposit of the withdrawn funds and receive service credit time for the withdrawn contributions, thereby moving the employee’s SCD for retirement backward and giving the employee credit for retirement eligibility and annuity computation.
2. Review Federal Employee Health Benefits (FEHB) health insurance coverage
If a federal employee is enrolled in the FEHB program, either through himself or herself or has coverage in the FEHB program through a spouse who also is a federal employee or annuitant, then the employee must retain FEHB coverage through at least the last five years of federal employment ending on the day of retirement in order to allow the employee to retain FEHB coverage throughout retirement. The federal government will continue paying its same share of the FEHB premiums for the retired employee as it did for the employee. Enrollment in TriCare (the health insurance program for members of the uniformed services) is also counted for purposes of fulfilling the “five-year” requirement.
3. Review Federal Employees Group Life Insurance (FEGLI) program choices
As their retirement gets closer, the need for life insurance for many employees diminishes. For example, some employees have life insurance in order to help pay off their mortgage when they die. But if an employee within five to 10 years of retirement is close to paying off his or her mortgage, the employee can perhaps decrease or eliminate the amount of his or her FEGLI coverage.
Those federal employees who need to add to their existing FEGLI coverage and who may not qualify for an individual life insurance policy with a private company may want to consider adding to their existing FEGLI coverage during the next FEGLI “open season” to be held September 1 – September 30, 2016.
Coverage is guaranteed but will not become effective until Oct. 1, 2017. To keep FEGLI coverage for retirement an employee must have been enrolled in FEGLI during the five years ending on the day the employee retires. Employees should note that FEGLI premiums get more expensive in retirement. An employee should evaluate his or her needs for life insurance in retirement as they get closer to retirement. Employees can reduce or eliminate their FEGLI coverage at any time by filling out and submitting Form SF 2817.
4. Consider enrolling in long term care insurance
Since many individuals today are living longer in retirement, there is a greater chance that individuals will eventually have a need for long term care (LTC). LTC can be expensive. Most individuals are not prepared to pay the cost of a stay in a nursing home or assisted living, or to pay for home health care on a long term basis. Employees are therefore encouraged to buy LTC insurance, and encouraged to buy LTC insurance when they are in their 50’s or early 60’s, within five to 10 years of retirement. Federal employees are eligible to fill out an application with the Federal Long Term Care Insurance Program (FLTCIP).
Federal employees can submit an application at any time but are encouraged to submit an application and get approved by the time they retire. They should do so for two reasons, namely:
- They are younger and premiums should be less expensive, at least initially, compared to buying it later when they are in their late 60’s and 70’s; and
- they have a better chance of getting the insurance when they are younger and healthier.
5. Consider Thrift Savings Plan Contributions and Withdrawal Options
If an employee expects to have a sufficient amount in his or her Thrift Saving Plan (TSP) by the time or retirement, then the employee should be contributing the maximum possible to their TSP. This includes regular contributions and “catch-up” contributions for employees at least age 50 as of Dec. 31. Unless these employees plan to immediately withdraw all of their TSP account shortly after retiring from federal service – and most employees do not – they should allow for long-term growth of their TSP accounts by investing primarily in the three TSP stock funds – The “C”, “S”, and “I” funds.
6. Examine Future Social Security benefits
Employees are encouraged to go MySocialSecurity online at www.socialsecurity.gov/myaccount and create their own Social Security account in order to view and print out their Social Security statement at any time. The statement a history of an employee’s Social Security and Medicare earnings history and FICA taxes paid, together with the estimated Social Security benefits that will be paid to the individual and to his or her family in the event of disability, retirement or death.
- Among the important questions employees should ask themselves when viewing their statements are:
- Is my earnings history correct? For any year(s) in which the Social Security wages are reported incorrectly, action should be taken to correct it;
- do I have enough credits to qualify for benefits?;
- If I am covered by CSRS and have previous military service, will I be affected by the “catch 62” provision?
7. Consider Future Medicare Enrollment
Federal employees who are within five to 10 years of retirement should understand which parts of Medicare they should enroll in and when they need to enroll. If they will retire from federal service before age 65, then they should enroll in Medicare Part A (hospital insurance at no cost) and Medicare Part B (medical insurance that requires monthly premium payments depending on the individual’s modified adjusted gross income) within a few months of their 65th birthday. If they are still working for the federal government at the time they are age 65 and are enrolled in the FEHB program, they should enroll in Medicare Part A within a few months of their 65th birthday. They should hold off enrolling in Medicare Part B until they retire from Federal service. They would enroll in Part B within the eight month period following their retirement date and enroll in Medicare Part B at a local Social Security office. The eight month enrollment deadline in Part B is done in order to avoid the late enrollment penalty in Part B. Information about the coordination between the FEHB program and Medicare Parts A and B may be found here which soon-to-be retired employees are encouraged to read.
8. Understand Survivor Benefits Payable Upon the Death of a CSRS or FERS Employee or Retiree
What should employees who are close to retirement consider with respect to survivor benefits? Survivor benefits are payable upon the death of an employee or annuitant at the time of his or her death. Survivor benefit elections made at retirement include:
- spousal (current and former) survivor CSRS or FERS annuity benefits; or
- insurable interest survivor annuity benefits.
9. Married Federal Employees: Be Aware of Surviving Annuity Options for Spouse
An employee may elect a maximum, partial or no survivor benefit to a current spouse. The spouse must provide written and notarized consent for other than a maximum survivor annuity benefit. A retiring employee must provide a survivor annuity to a spouse in order for the spouse to keep the FEHB health insurance benefits in the event the employee predeceases the spouse.
10. Update Your Estate Plan
As federal employees get closer to retirement, it is a good time for them to update their estate plan. Among the most important parts to a proper estate plan are:
- Beneficiaries named for any type of an account in which a beneficiary can be named. A beneficiary can be named for the TSP, for a life insurance policy, for IRAs and for bank and brokerage accounts;
- a will or a trust for assets in which beneficiaries cannot be named;
- a living will and an advance power of attorney for financial asset management; and
- setting up a trust to minimize the possibility of having to pay state estate or inheritance taxes if their states impose such taxes.
One Year Prior to Federal Retirement
There are a number of important actions an employee within one year of retirement should perform in order for the employee to properly retire on the particular date he or she wants to and without any problems. These actions are:
Confirm Retirement Eligibility Date
Get a confirmation of what date- year, month and day – will meet the retiring employee’s minimum age and service eligibility requirement for the type of retirement system the employee is covered by – CSRS or FERS. If the employee is employed in a special provision position – a law enforcement officer, air traffic controller, firefighter, customs and border official, or a military technician – that the employee meets the minimum age and service requirements to retire. Or, if the employee has reached maximum age for that particular special provision position, then when the employee is required by law to retire.
Pick a Day to Retire
Within the following 12 months, the employee should choose a particular month and day to retire.
Inform Your Supervisor
Inform one’s supervisor of the anticipated retirement date as early as possible. This will give the supervisor the necessary time for succession planning.
Meet With Personnel/HR
Make an advance appointment with the appropriate personnel official to review one’s Official Personnel File (OPF) or its equivalent. This should be done in order to ensure that records are complete and accurate, that all Federal service has been verified, that deposits for temporary and military service have been confirmed, that any redeposits have been confirmed, and that Federal health insurance (FEHB) and life insurance(FEGLI) participation has been documented (see below).
Establish Federal Retirement Folder
[Note: The latest Standard Forms (SF) from the Office of Personnel Management mentioned in this article can be found here.]
The federal employee and the agency’s retirement counselor should establish a retirement folder for the employee. Among the forms that be placed in the folder are Form SF 2801 (Application for Immediate Retirement, CSRS and CSRS Offset) or Form SF 3107 (Application for Immediate Retirement FERS and “Trans”FERS) and SF 144 (Statement of Prior Federal Service) .
The federal employee should also make sure that the OPF includes official documentation of the following:
(1) the beginning and ending dates of each period of creditable civilian service;
(2) the effective dates for each promotion or within –grade increases, particularly within the last three to five years of service that affect the high-three average salary calculation;
(3) the tour of duty during any part-time appointment;
(4) a record of the time when employed as a temporary employee (“non-deduction service”); and
(5) documentation of the dates of military service.
Review Designation of Beneficiary Forms
Federal employees should review all designation of beneficiary forms for completeness ( and updating them if necessary), including:
(1) SF 2808 (Designation of Beneficiary – CSRS contributions) or SF 3102 (Designation of Beneficiary – FERS contributions). Note that “Trans”FERS employees must complete both Form 2808 and Form 3102;
(2) TSP 3 (Designation of Beneficiary – Thrift Savings Plan); and
(3) SF 2823 (Designation of Beneficiary – Federal Employee Group Life Insurance).
Review Survivor Benefit Annuity Benefits
Federal employees within one year of retirement should review and understand the applicable survivor (CSRS or FERS) annuity benefit considerations, including:
- The type of survivor annuity election that can be made such as for a current spouse, for a former spouse, or for an individual with an insurable interest in the employee.
- Requirements that the current and/or former spouses must meet to be eligible for survivor annuity benefits.
- The cost of survivor annuity benefits and the amount of survivor annuity benefits.
- The effect of court-ordered survivor annuity benefits and TSP for a former spouse.
- The ability to increase or to institute a CSRS or FERS survivor annuity benefit within a limited period following one’s retirement and the cost associated with this late election.
Completeness/Accuracy of Health and Life Insurance Records
An employee within one year of retirement should confirm with his or her personnel specialist that the employee’s OPF includes the following documentation:
(1) A records of all federal health benefit enrollments on SF 2809 (Employee Health Benefits Registration form) and if appropriate, SF 2810 (Notice of Change in Health Benefits Enrollment). Employees should be meticulous in making sure that OPM is given a complete history of health benefits enrollment for the five years preceding retirement.
(2) A record of the current federal life insurance coverage on SF 2817 (Life Insurance Election).
Healthcare Flexible Spending Accounts
Finally, those employees who will be retiring within one year and who are enrolled in the health care flexible spending accounts (HCFSA) and/or the Dependent Care flexible spending accounts (DCFSA) should make sure that they use up all of their HCFSA and DCFSA funds by the time they retire. Any unused HCFSA and DCFSA funds will be forfeited. Withdrawals from the HCFSA can be used to pay for any qualifying out-of-pocket medical, dental and vision expenses including deductibles, co-payments, co-insurance, eyeglasses, hearing aids, orthodontics and reimbursements for travel to a doctor, ophthalmologist, optometrist, hospital or dentist. DCFSA funds can used to pay for the dependent care expenses associated with a child younger than age 13 or a dependent adult. More information can be found at www.fsafeds.com.
First Year of Federal Retirement
1. What to Do Before Your First Full Annuity Check Arrives
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An annuitant’s first annuity check should arrive – that is, direct deposit in a bank account – two to three weeks after the Office of Personnel Management’s (OPM) retirement office receives the recently retired employee’s retirement application package. OPM provides retirees an annuity statement and other materials after the retirement claim is processed. Depending on the OPM retirement office’s retirement application processing volume, it may take that office anywhere from one to six months to process a retirement application. In the meantime, a recently retired employee will receive “interim” annuity checks that are estimates of the actual annuity check due the annuitant. The “interim” annuity checks may amount to 50 to 90 percent of the actual annuity check.
While waiting for their first full annuity check, annuitants should make sure that they have a sufficient amount of liquid assets or cash, ideally equal to at least three to six months of their average monthly expenses. They will need these funds to help pay their everyday bills while they are waiting for their first full annuity check. A passbook savings account or a money market account are two suitable types of accounts in which these liquid assets are deposited.
2. Develop Financial and Lifestyle Plans
Failure to have a financial plan in retirement is one of the most common reasons why retirees encounter financial problems early in their retirement years. Not surprisingly, financial planners are nearly unanimous in their recommendation for soon-to-be-retirees to consult with a qualified financial planner in order to establish a financial plan for one’s retirement years.
Having a financial plan for retirement includes such items as setting up a budget for retirement, paying off one’s mortgage or other debts, a timetable to start tapping into retirement accounts such as the Thrift Savings Plan (TSP) and IRAs, when to start receiving Social Security retirement benefits, and reviewing insurance coverages.
Besides a financial plan, a lifestyle plan for retirement is important. While most soon-to-be-federal retirees are excited about their pending retirement, the “honeymoon” phase of their retirement could last just a few months into retirement. At that point, retirees who have a good lifestyle plan in place are working on things that bring meaning and fulfillment into their lives. Retirees who have not seriously thought about what brings meaning and fulfillment into their lives will likely discover that after six months into retirement, retirement is not the terrific experience they thought it would be. At that point, they may have to return to the workforce in order to make their lives “meaningful” and “fulfilled”.
3. Understand Impact of Taxes on Their Federal Retirement Benefits
Many annuitants are not aware that most of their federal retirement pension income is subject to federal and in many states, state and local income taxes. Perhaps as early as the first or second month of a retiree’s retirement, the annuitant should meet with a tax professional to discuss the impact of taxes on their federal pension income. Among the actions that a tax professional may recommend is that an annuitant pay quarterly estimated taxes to the Federal government and/or to a state government in order to make up for any lack of income tax withholding from an annuitant’s monthly CSRS or FERS annuity check, Thrift Savings Plan (TSP) withdrawals, and Social Security monthly benefits.
How much of the CSRS and FERS annuities are subject to federal income tax? Most CSRS and FERS annuitants will pay federal income tax on their annuities. The annuities are taxed at “ordinary” and not “preferential” tax rates.
Annuitants will not pay taxes on the money they have contributed to the CSRS and FERS Retirement and Disability Funds during the years they worked in federal service. These contributions were deducted from an employee’s after-taxed salary. Retirees have therefore already paid taxes on these contributions and will not pay taxes again on the same contributions when the contributions are returned to annuitants as part of their monthly CSRS or FERS payment.
The contributions that annuitants have paid federal (and state) income taxes will be paid back to the annuitant over their life expectancy, using the IRS Simplified Rule. It make take a period of 30 or more years to pay back the contributions, depending on at what age an employee retires and whether the employee elects to give a survivor annuity.
There is also the issue of state and local income taxes. There are seven states that do not have a state income tax and do not tax CSRS and FERS annuities. Some states that have state and local income taxes do not tax CSRS and FERS annuities. Annuitants should therefore discuss with their tax professional early in the first year of retirement the impact of state and local taxes on their CSRS and FERS annuities.
TSP withdrawals are fully taxable for federal and in most states that have state and local income taxes. A portion of Roth TSP withdrawals – the accrued earnings – may be taxable depending on whether the Roth TSP withdrawal is a “qualified distribution”. Once again, a TSP account owner should discuss with his or her tax professional the Federal and state income tax impact on TSP withdrawals. It should be noted that the TSP does withhold federal income taxes but does not withhold state income taxes on withdrawals.
Social Security retirement benefits are for most Social Security recipients federal taxable. As much as 85 percent of Social Security income is added to other income in the determination of gross income. Several states also impose state income tax on Social Security benefits.
4. FERS Employees Who Retire Before Age 62: Understand the FERS Annuity Supplement
The FERS retiree annuity supplement is paid by OPM to FERS annuitants who retire before age 62 under an immediate, unreduced retirement. The annuity supplement is payable to FERS employees who retire early (before their minimum retirement age or MRA) upon reaching their MRA. The FERS annuity supplement approximates a FERS annuitant’s Social Security benefit at age 62 based only on FERS civilian service, and provides a “bridge” of income between a FERS annuitant’s day of retirement and age 62. At that time, a FERS annuitant becomes eligible for Social Security retirement benefits. The annuity supplement ceases the month that the FERS annuitant becomes age 62.
The annuity supplement is subject to an annual “earnings test”. This means that a FERS annuitant younger than 62, receiving the annuitant supplement and working could lose some, if not all, of the annuity supplement if the annuitant’s earned income is too large. “Working” – in receipt of earned income – is considered either receiving a salary check or being self-employed with a net profit. For example, during 2016, for every $2 an FERS annuitant under age 62 (and receiving the FERS annuitant supplement) earns above $15,720, OPM will reduce the annuity supplement by $1.
Following the year in which a FERS annuitant received the annuity supplement and also had earned income, the annuitant must report to OPM what he or she earned during the previous year. The reporting is done on OPM Form RI 92-22. For example, if a FERS employee retired in early 2015, received the annuity supplement during 2015 and was working post-federal retirement, then the annuitant must report to OPM on Form RI 92-22 his or her earned income post-retirement during 2015. The form should be filed with OPM as early as possible in 2016. This reporting requirement continues every year while the annuitant receives the annuitant supplement and has earned income.
5. Develop Strategy of When to Start Receiving Social Security Retirement Benefits
All FERS annuitants, and many CSRS annuitants, are currently or will be eligible to receive Social Security retirement benefits. FERS annuitants may be eligible to receive the larger of their benefit or half of their spouse’s benefit, or all of their deceased spouse’s, or former spouse’s, Social Security benefit.
Annuitants can receive their Social Security retirement benefits as early as age 62. But if they start receiving benefits at age 62, their benefits will be permanently reduced. The earliest age for an unreduced Social Security retirement benefit – full retirement age or FRA – is between ages 65 and 67 depending in which year an annuitant was born. If the annuitant delays the start of Social Security benefits until age 70, the benefit would be permanently increased by 24 to 32 percent.
The question therefore becomes: What is the best age to start receiving Social Security benefits? The answer depends on two factors: (1) The annuitant’s health; and (2) the annuitant’s need for additional income. Also, if the annuitant is younger than full retirement age and is working, there is the issue of the Social Security “earnings” test.
To assist annuitants in trying to decide when to start receiving Social Security retirement benefits, the annuitant may have to meet with a financial professional who is completely familiar with Social Security rules. Ideally, this should be done during the first year of retirement in order to develop a proper strategy.
6. Federal Employees Retiring at Age 65 or Older: Be Aware of the Medicare Enrollment Rules to Avoid Penalty
Federal employees who retire before age 65 from federal service before they are age 65 and keep their Federal Employees Health Benefits (FEHB) insurance for retirement are highly encouraged to enroll in both Medicare Part A (hospital insurance) and Medicare Part B (medical insurance) within a few months of their 65th birthday. Those employees who retire from federal service after they are age 65 can delay enrolling in Part B until they retire. An employee need not be enrolled in Part B if he or she is still working and is enrolled in a group sponsored health insurance plan (such as the FEHB program). While enrolling in Part A is not necessary, an employee should enroll in Part A because, unlike Part B, there is no monthly premium associated with Part A.
Once an employee over age 65 does retire from federal service, the retiree must enroll in Medicare Part B within eight months following his or her retirement date. This is being done to avoid a Part B late enrollment penalty. If the employee fails to enroll in Part B within the eighth month period following his or her retirement, then the retiree will have to wait until the following January 1st to enroll in the general enrollment period for Medicare Part A and Part B. This general enrollment period is from January 1 through March 31, with enrollment taking effect the following July 1st. The penalty of 10 percent per year of the Part B premium, starting from the first day of the month following the employee’s retirement date and through the following June 30, will be in effect. The following illustrates:
Joseph, age 67, retired from federal service on Dec. 31, 2014 with FEHB health insurance coverage. Joseph failed to enroll in Medicare B between January 1 and August 31, 2015. He enrolled in Part B between January 1 and March 31, 2016, with coverage taking effect July 1, 2016. As a result of late enrollment in Part B (10 months delay between Sept. 1, 2015 and June 30, 2016) Joseph owes an additional monthly premium of:
10 months x 10%/12 months x $121.80/month
= $10.15 additional premium per month (permanent increase
7. Enroll in Long Term Care Insurance No Later Than the End of the First Year of Retirement
In the health care crisis in the U.S talked about so much during the last few years, one thing has not been discussed as much – the looming long term care crisis that will be facing many current and future retirees. If an individual reaches age 65, there is a 70 percent chance that this individual will eventually need some type of long term care by the time he or she is age 85. To protect their estates against the astronomical cost of long term care, individuals are encouraged to buy long term care insurance (LTC). Most financial advisors recommend buying LTC insurance when an individual is in his or her late 50’s or early 60’s. The individual is still healthy to qualify to obtain LTC insurance and the premiums should be “reasonable”.
Federal employees can apply for the Federal Long Term Care Insurance Program (FLTCIP) at any time by downloading an application at www.ltcfeds.com. They can apply whether they are an employee or a retiree. Since many employees retire in their late 50’s or early 60’s, employees are therefore encouraged to apply for LTC insurance by the end of the first year of retirement.