For many employees, their federal retirement date comes sooner than they may have expected and before they may have had a chance to fully prepare.
But with a proper amount of planning, federal employees can do more than just dream about a comfortable federal retirement, they can make an effort to make it happen. While no one knows what the national economy and investment landscape will be in the next 10, 20 or 30 years, all employees who are close to retirement are highly encouraged to prepare.
The following are eight of the most common areas that need to be addressed by federal employees who plan to retire within the next five years.
1. Be realistic about income needs during retirement.
Many employees utilize a “bottoms-up” approach to their estimates of income needs during retirement. Some employees use their current expenses and make a determination of their income needs. Other employees use a percentage of their current income – for example, 70 to 80 percent – of their current gross annual salary as a method of determining cash flow needs during retirement. But additional consideration must be made to lifestyle aspirations during one’s retirement years. For example, will a sufficient amount of income be set aside for travel – a high priority for retirees during the early years of retirement? Will there be sufficient income and assets to help struggling relatives, especially children who are raising their own families in very stressful economic times?
2. Do not underestimate the effect of “true” inflation.
Many employees make the mistake that they look at their current monthly income and assume they will “get by” during their retirement years. What they may not realize is that high rates of “true” inflation – the inflation that affects energy, food and medical expenses, may permanently derail projected income needs. Since most of us will be living longer and life expectancies are increasing at a consistent pace, inflation becomes a formidable factor to those planning to retire in the near future.
3. Fully appreciate the relationship between “risk and return,” and how it applies to one’s Thrift Savings Plan (TSP) account.
For many TSP account owners, risk connotes something “bad” but to a long term investment plan or portfolio such as the TSP, the “risk and return” relationship is how investments can enhance returns that can outpace inflation. The simple fact is that if TSP account owners hope to maintain their TSP account throughout their retirement years, they must take risk and invest the majority of their TSP account in the three TSP stock funds.
4. Social Security – Decisions to Make.
As retirement gets closer, questions may arise concerning Social Security, including at what age should one file for benefits and will working longer have a significant effect on one’s retirement benefit. Three advantages offered by Social Security include:
- A steady stream of lifetime income;
- Annual cost-of-living adjustments; and
- Benefits for eligible family members at the earliest possible starting age of 62.
Age 62 seems to be a popular age for starting Social Security resulting in a permanently reduced benefit. But waiting to start retirement benefits should be considered if an individual is relatively healthy. Spousal or formal spousal benefits should also be considered.
5. Health care expenses will only rise in costs.
Federal annuitants are entitled to keep their health insurance benefits throughout their retirement with the government paying 72 to 75 percent of the health insurance premiums. But that does not mean that annuitant’s out-of-pocket expenses for health care will not increase. Annuitants’ health typically declines as they get older. Annuitants are encouraged to enroll in Medicare Parts A and B when they are first eligible — normally age 65.
6. Review life insurance coverage.
Many employees approaching their retirement date have a decreasing need for life insurance coverage. Their mortgages have been paid off, children are financially independent, and there is a sufficient liquidity for funeral expenses. Those employees who are enrolled in the Federal Employees Group Life Insurance (FEGLI) should review their life insurance needs at the time of submitting their retirement application. This is because FEGLI increases in cost significantly if one retains the full amount of FEGLI coverage during retirement.
7. Nursing Home and Long Term Care — a challenge for now and future generations.
There are three ways to pay for nursing home and long term care:
- Pay from individual savings and investments;
- Purchase long term care insurance; or
- Use government benefits through Medicaid.
Funding nursing home care with Medicaid is highly discouraged. While some federal annuitants may be able to pay for nursing home care by using their TSP and other investments, several years of nursing home care could severely affect retirement cash flow. Long term care insurance is therefore highly recommended. But depending on an employee or a retiree’s age and type of benefits, long term care insurance can be expensive. The worst case scenario is a married employee or annuitant in which one spouse may need long term care and will drain the income needed to support both spouses during their retirement years.
8. Having a complete and current estate plan.
Retirement is the perfect time for employees to make sure their estate plan is complete and current. A complete estate plan includes a written plan involving disposition of assets at death and designation of beneficiaries for any asset that allows for such designation. These assets include life insurance, TSP, IRAs, bank and brokerage accounts. It is also important that the following documents are prepared:
- Power of Attorney, as they directly relate to the management of the client’s assets;
- Health Care Power of Attorney, as they directly related to the health care issues, and a
- Living Will.
Much has been written about the predicted onslaught of retirement by federal employees during the next five to 10 years. While much of these retirements are a result of the “political winds” currently blowing in Washington, employees should take the proper steps and prepare themselves for what is for many individuals one of the most important stage in their lives — their retirement.